BB&T's Results And Guidance Better Than They Seem, But Return Prospects Are Modest

BB&T (BBT) shares have outperformed since my last update and over the last year, due, at least in part I believe, to the counter-cyclical earnings leverage potential of the upcoming merger with SunTrust (STI). Although investors weren’t thrilled about the earnings and guidance offered by the company this time around, I believe the underlying business trends are a little better than they otherwise seem, and I believe the company is on a decent footing for this late stage of the bank cycle.

As far as the investment angle goes, I won’t pound the table for BB&T at today’s price, but it’s a decent prospect relative to peers and rivals like JPMorgan (JPM), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). All of these names offer their own perks and challenges (JPMorgan and PNC as quality growth, U.S. Bancorp as a safe haven, Wells Fargo as a restructuring story), and I think BB&T has decent return prospects (high single-digit to low double-digit returns) as well as the potential for better-than-expected post-merger synergies and growth.

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BB&T's Results And Guidance Better Than They Seem, But Return Prospects Are Modest

Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

BB&T (BBT) has done okay over the last quarter, slightly outperforming the regional banking averages since the first quarter. BB&T’s strong fee-generating businesses are increasingly valuable as net interest margin compression looks to intensify, and the bank’s merger with SunTrust (STI) appears on track for a Q3/Q4 close. Unfortunately, while the merits of the deal still look quite sound on a long-term basis, both banks have exposure to tightening spreads over the next year.

Factoring in the impact of rate cuts, tempered in part by loan growth and fee-based income growth, as well as the deal benefits, I believe BB&T is modestly undervalued below the mid-$50’s. Cost savings and loan growth will be invaluable offsets to margin pressures in 2020, but given the challenges seen with past mergers of equals in the banking sector, I expect a “wait and see” attitude from many investors on these shares.

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Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

Expectations have been relatively low for Wells Fargo (WFC) ever since the asset cap was put into place, but this large bank has nevertheless managed to disappoint, with the shares underperforming banking indices by about 12% over the last six months and 10% over the last three months. With a sizable number of Wells Fargo’s peers now having reported their first quarter earnings, a look back at Wells Fargo does not look so good for this struggling bank.

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With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

BB&T Basically On Track Ahead Of Its Game-Changing Merger

Despite the significant long-term potential benefits of BB&T’s (BBT) merger of equals with SunTrust (STI), the market is still generally against M&A in the banking sector, and BB&T shares have lagged regional bank indices a bit since the deal announcement (about 300bp of underperformance). I continue to believe this is a strong merger, though, and I think BB&T shares remain one of the more interesting values among banks in its weight class.

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BB&T Basically On Track Ahead Of Its Game-Changing Merger

U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

As one of the best banks out there in terms of quality, U.S. Bancorp (USB) tends to be better as a “safe haven” or a long-term holding. When bank stocks were falling apart in late 2018, U.S. Bancorp held up a little better, but the shares have also lagged peers since the start of this year as banks have largely kept pace with the S&P 500.

I expect that it is going to be harder for banks to grow going forward, as I think net interest margins are peaking and credit costs are likely to head higher from here. Loan growth is healthy now, but I do still have some concerns about the overall economy. With that backdrop, I think organic growth drivers are going to be more important, and with U.S. Bancorp now free of its consent orders, it has more options to drive growth through organic expansion and branch rationalization. U.S. Bancorp isn’t particularly cheap now, but it’s definitely a name to watch for relative underperformance.

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U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

BB&T Shifts Gears In A Huge Way, Announcing A Value-Creating Mega-Merger With SunTrust

For a company that had repeatedly said it wasn’t all that interested in whole bank M&A, BB&T (BBT) shifted direction in the biggest way possible, announcing on Thursday that it had reached an agreement with SunTrust (STI) to combine in a true merger of equals that will create the sixth-largest bank in the U.S. and a major force in the Southeast.

There are heightened execution risks to this deal, but I basically like it. Cost savings should exceed initial targets, and the combined company will not only see significant synergy in areas like commercial banking and fee-generating operations (like insurance and investment banking), but also be better-able to compete with far larger banks like Bank of America (BAC), Wells Fargo (WFC), and JPMorgan (JPM) when it comes to investing in the technology and digital services that seem likely to drive the next wave of banking.

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BB&T Shifts Gears In A Huge Way, Announcing A Value-Creating Mega-Merger With SunTrust

South State Bank Still Grinding Through Some Repositioning

“Ground and pound” may be effective, even necessary, as a strategy, but it’s not a lot of fun to watch, and I believe the sluggish near-term results (and expectations) for South State Bank (SSB) continue to explain this bank’s relative underperformance to broader bank indices, as well as regional peers/rivals like BB&T (BBT), Bank of America (BAC), First Citizens (FCNCA), SunTrust (STI), and Wells Fargo (WFC). Although loan growth has perked up a bit and deposit costs remain low, real earnings acceleration is probably more of a 2H’19 event and the shares aren’t comparatively all that cheap now.

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South State Bank Still Grinding Through Some Repositioning

Does KeyCorp Really Deserve To Be So Unpopular?

What do you do with a stock that seems too cheap when you’re not all that fond of the company? That’s the question I have with KeyCorp (KEY), as this is definitely not my favorite bank, but I can’t really get a good handle on why it is trading so far below what would otherwise seem to be a normal valuation range. KeyCorp’s long-term track record isn’t the best, and there are issues with its deposit base and branch network, but it seems like the Street is really down on this name relative to the underlying fundamentals.

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Does KeyCorp Really Deserve To Be So Unpopular?

CenterState Is An Attractive 'Strong Getting Stronger' Story

This isn’t a great point in the banking cycle, as rate hike benefits are tapering off, the economy seems to be slowing, and credit costs are likely to increase substantially from here. That said, if you are still interested and willing to invest in banks, I think Florida’s CenterState (CSFL) is a name to consider. It’s a higher-risk, higher-growth story than ideas like SunTrust (STI), PNC (PNC), or BB&T (BBT), but management has generated some impressive results with a coherent, disciplined M&A and organic growth plan. Moreover, I think CenterState could be a “heads you win, tails you win” situation with respect to M&A – I believe CenterState would be an attractive target to many super-regionals, but they don’t need to get bought for this idea to work.

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CenterState Is An Attractive 'Strong Getting Stronger' Story

SunTrust Offering A Strong Story Going Into 2019

Both SunTrust (STI) and BB&T Corp. (BBT) seem to have a lot working for them going into 2019, including improving cost leverage from digital investments, stronger-than-average loan growth in relatively attractive regional markets, and strong deposit franchises anchored by long-term leadership in those same markets. And probably not so surprisingly, they’re both priced for things going relatively well.

With what appears to be somewhat limited capacity to fund attractively priced loan growth and the likelihood of higher provisioning expense in the coming years, SunTrust’s earnings growth potential looks lackluster (in the low single digits), but the company pays a good dividend, could have some upside/outperformance potential in the numbers, and the shares are still undervalued, even if not so much so as other Southeast banks like Regions Financial Corp. (RF), First Horizon National Corp. (FHN), or Synovus Financial Corp. (SNV).

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SunTrust Offering A Strong Story Going Into 2019

Sandy Spring Stumbles On Fee-Based Income As Funding Remains A Concern

In what has been an “okay, but not great” quarter for bank earnings report, small-cap metro D.C. bank Sandy Spring Bancorp (SASR) definitely skewed toward the “not great” part, sending the stock down about 10% at the worst point post-earnings. The reaction might have been a little overdone, but funding issues remain front and center, and I have some concerns about ramping competition in the D.C. metro area, not to mention the possible impact to the company’s D.C.-area loan portfolio if the government shutdown stretches on.

I don’t want to harp on the funding/spread concerns, but it’s the biggest risk I see with Sandy Spring, and that has been the case for a little while now. I believe that Sandy Spring has a strong brand and core business in an attractive market (and opportunities to make accretive deals down the road), but that attractive market is drawing in more competition and management will have to rise to the challenge. I believe they can and will, and I believe the shares remain undervalued below the mid-$30’s to $40.

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Sandy Spring Stumbles On Fee-Based Income As Funding Remains A Concern

BB&T Ends 2018 On A Strong Note

BB&T (BBT) has a knack for being a little out of sync with its banking peers, and that’s not always (or even often) a bad thing, as BB&T has generally been of the long-term outperformers in its peer group. In this particular case, “a little out of sync” means a little more apparent loan growth momentum heading into 2019, not to mention some potentially above-average benefits to come from tech investments and regulatory changes.

My revised numbers for BB&T support a fair value in the low-to-mid $50s, and I’m perfectly to continue holding these shares in my own account. I can’t really call them a top idea for new money, though, as PNC (PNC) and Comerica (CMA) both look cheaper, as do Wells Fargo (WFC) and Citigroup (C), though those are more troubled and controversial picks today.

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BB&T Ends 2018 On A Strong Note

Quality Not Helping PNC Financial Much, As Growth Concerns Mount

I expressed some concerns with PNC Financial’s (PNC) position vis a vis near-term growth prospects last quarter, and those concerns really haven’t gone away. I think this is a very well-run bank and a solid candidate for a long-term position, but the lackluster results (highlighted by weak loan and revenue growth) have led to relative underperformance compared to other large banks like BB&T (BBT), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB), and J.P. Morgan (JPM).

Not much has really changed in my basic view of PNC Financial. I do see some risks to the company’s middle-market lending business and its “thin branch” digital banking expansion, but I think those risks are more than adequately reflected in the share price. Likewise, while I don’t dismiss the risk of weaker economic conditions over the next two or three years, just low single-digit adjusted earnings growth is enough to drive an appealing long-term return from here.

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Quality Not Helping PNC Financial Much, As Growth Concerns Mount

With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

In a bad market for banks, U.S. Bancorp (USB) has managed “less bad” performance, with the shares doing better than the average bank (down 13% versus a roughly 20% drop over the past year) and better than peers like PNC (PNC), Wells Fargo (WFC), and Citigroup (C), and particularly so in the last three to six months, as the Street seems slightly consoled by U.S. Bancorp’s more bullish loan growth outlook for 2019 and its improving operating leverage.

U.S. Bancorp makes sense as a safe haven/flight-to-safety pick in banking, as the company has long been a leader in efficiency and profitability. While I think U.S. Bancorp may see a little more pressure on spread-based revenue growth than some bulls believe, I think the bank’s strong fee-generating operations will help fill the breach, as will improving operating leverage.

The banks I think are run best and best-positioned for this part of the cycle (JPMorgan (JPM), BB&T (BBT), and USB) seem to offer the least upside from here relative to names like PNC, Wells Fargo, and Citi, and that’s not exactly surprising given the sharp sentiment shift. U.S. Bancorp probably has less upside if 2019 turns out to be better than expected, but I continue to believe this is a solid long-term core holding for more conservatively-inclined investors.

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With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

BB&T Committing To Tech Over M&A To Drive Growth

In a relatively short of period of time, both the operating environment and operating philosophy of BB&T (BBT) seem to have changed in meaningful ways. Management has now gone out of its way to make clear that its priorities lie with organic, tech investment-driven growth versus M&A, while the regulatory environment seems to be moving in a direction that will allow BB&T to run a leaner, higher-yielding balance sheet.

While not all of BB&T’s recent updates were universally positive, and my fair value is not really changing at this time, all told I believe BB&T is on a good path. Although I do still believe that there are a few more deals in BB&T’s future, I can’t argue with a management strategic that is focused on being leaner and more responsive while exploiting the bank’s existing specialty capabilities.

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BB&T Committing To Tech Over M&A To Drive Growth

Playing M&A Bingo With BB&T

When an historically acquisitive bank signals that they’re reading to start considering M&A again, I don’t think it’s much of a stretch to start speculating on the sort of target(s) the company might have in mind. In the case of BB&T (BBT), while management has certainly laid out a case for worthwhile organic growth by focusing on its core strengths in business and consumer lending, the company has also laid out a clear set of criteria for future M&A, and I believe management would like to make a significant deal (or two) to vault the company over the $250 billion asset level.

Deal or not, I believe BB&T shares are modestly undervalued today. While there are certainly other options in BB&T’s size range worth considering (including PNC (PNC)), I believe mid-single-digit growth can support an attractive return at today’s price.

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Playing M&A Bingo With BB&T

Bay Banks - Interesting Opportunity, But A Lot Of Work To Do

Investors have hundreds of bank stocks to choose from, and within that pool you can find a story to fit almost any preferred investment strategy. In the case of tiny Bay Banks of Virginia (OTCQB:BAYK), the opportunity here revolves around leveraging the Virginia Commonwealth acquisition to gain more low-cost deposits and gain share in the fragmented Richmond and Virginia Beach markets, while also pivoting towards a more commercial-oriented lending mix and building up the fee-generating treasury and asset management operations.

Although these shares have sold off since second quarter earnings, they’re still not all that cheap on a standalone or peer basis. I like the opportunity Bay Banks has to generate above-average growth from improving its deposit composition, gaining loan share in underserved markets, and leveraging its enhanced scale, but not enough to stretch for this stock today.

Readers should also note that Bay Banks has less than ideal liquidity, though the company is pursuing a NASDAQ listing, and that should ultimately improve liquidity.

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Bay Banks - Interesting Opportunity, But A Lot Of Work To Do

Synovus Reaches For Growth, And Gets Its Hand Slapped

Institutional investors can be a curious bunch at times, and trying to please them can be a little like dealing with Veruca Salt. Bank stocks have fallen out of favor recently as investors have grown more concerned about growth in the sector, but companies that choose to put surplus capital to work in growth-oriented M&A are getting punished even worse. Georgia-based mid-cap bank Synovus (SNV) is seeing that first-hand, as the shares are down about 10% since the company has announced both second-quarter earnings and its all-stock deal for Florida-based FCB Financial (FCB).

Although I don't think FCB is necessarily the best target for Synovus, the deal significantly raises Synovus's status in the Southeast region of the country and gives it a fast-growing loan franchise in a state with above-average population growth trends. I also didn't think that Synovus was particularly cheap prior to this announcement, but I do believe this deal will add value provided the credit quality of FCB's rapidly-built loan book holds out.

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Synovus Reaches For Growth, And Gets Its Hand Slapped

Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

I had thought BB&T (BBT) had been making some progress in resolving at least some of the issues that had led the bank to underperform peers like PNC (PNC), SunTrust (STI), Fifth Third (FITB), and Regions (RF) in recent years. One quarter doesn’t really change a story, but BB&T’s lackluster results and guidance do suggest that the turnaround isn’t happening quite as fast or smoothly as the bulls might hope.

While the sell-off after earnings was probably at least partly due to the lower guidance, I believe the market also didn’t like the indications that large bank M&A was likely coming back onto the near-term agenda once the bank is fully clear of its consent orders. Selling BB&T because you don’t like M&A seems pretty silly given that M&A has always been core to this company (and management has never backed away from that as an ongoing long-term driver), but then that’s Wall Street for you.

I can’t say that BB&T is all that cheap today, and I’m a little troubled that BB&T seems to be unable to generate the sort of growth initiatives that peers like PNC have put into place. Although the shares are somewhat undervalued on the assumption of mid-single-digit long-term earnings growth, I won’t make a forceful argument that investors should choose this stock over PNC, U.S. Bancorp (USB) or other options in the banking sector.

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Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

BB&T Making A Slow Turn In The Right Direction

It has taken a while, but BB&T (BBT) continues to show signs of improvement and close some of the performance gap with peers like PNC Financial (PNC), Fifth Third (FITB), Comerica (CMA), Key (KEY), and U.S. Bancorp (USB) that built up over the past few years. Although lower loan growth is a disappointment, a low deposit beta and rising interest sensitivity offset it somewhat, and management is doing well on expenses and credit quality.

When it comes to valuation, I think the market has it more or less right at this point (which hasn’t often been the case). U.S. Bancorp and Wells Fargo (WFC) are cheaper (for good reasons) and PNC arguably offers better quality today for a similar level of expected return, but I believe BB&T has more self-improvement potential and more potential for higher/better earnings revisions over the next few years.

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BB&T Making A Slow Turn In The Right Direction