Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18Earnings Update
Prev. Ed.:4Q17and 2017 Earnings Update,Mar 8, 2018
Brokers’ Recommendations:Positive: 57.9% (11 firms); Neutral: 42.1% (8); Negative: 0.0% (0) Prev. Ed.:7;12;0
Brokers’ Target Price: $57.62 (↑$1.44 from last edition; 17 firms) Brokers’ Avg. ExpectedReturn:4.9%
A flash update on 1Q18Earnings was done on Apr 19, 2018.
Portfolio Manager Executive Summary
BB&T Corporationis a financial holding company in the United States, conducting commercial banking operations primarily in the southern and eastern seaboard states.
Trend of Broker Opinions:Broker sentiment on the stock remains skewed toward the positive side, with57.9% of the firms in the Digest group rating the stock positive and the remaining42.1% rating it neutral. None of the firms rated the stock negative.Target prices provided by the firms range from a low of $49.00 to a high of $63.00 per share.The average came in at $57.62, implying a return of 4.9%.
Chief Investment Considerations:
- Diversified business mix
- Expanding footprint in Texas
- Growing fee income
- Easing margin pressure
- Synergies from acquisitions
- Strong capital position
- Well positioned for inorganic growth
- Improving credit quality
- Stable loan and deposits growth
- Rise in operating expenses
Positive or equivalent – Eleven firms or 57.9%: According to these firms, BB&T continues to have scope for an upward trend on the back of favorable operating leverage, higher scope of loan growth and inorganic growth efforts. Further, various growth strategies in the form of improved product mix and innovative product offerings will attract investors, thereby increasing profitability. According to these firms, growth in commercial loans, as well as low changes in deposit costs, bodes well for the company’s organic growth. Additionally, these firms believe a lower risk profile and higher financial flexibility support BB&T’s expansion plans. Finally, improved growth outlook, along with attractive dividend yields, raises optimism for the company.
Neutral or equivalent –Eight firms or 42.1%: According to these firms, BB&T is better positioned compared to its peers, given its diverse business footprints, strong geographical location and expansion potential.Further, given a strong balance sheet as well as stable loan and deposit growth, the company is expected to expand organically and benefit from acquisitions. Also, the company will likely enhance operating efficiency driven by the success in achieving its cost-reduction target. Notably, an improving economy along with the rate hikeswill likely continue to improve net interest margin, which will further support top-line growth.Also, these firms believe BB&T has healthy growth prospects driven by a robust capital position and continued focus on enhancing its market share. Nevertheless, as the company derives majority of its earnings from lending activities, there are risks related to credit losses if the economic condition deteriorates.Further, these firms believe, as the company is shifting away from Indirect Auto and other mortgage balances, this will likely impact its growth trajectory to some extent.
May 18, 2018
Overview
Founded in 1906 and headquartered in Winston-Salem, NC, BB&T Corporation is a diversified financial holding company. BB&T is one of the country’s major providers of banking and financial products. Its bank subsidiaries operate through nearly 2,100 financial centers across 15 states and Washington D.C.
Effective 4Q17, BB&T operates through the following five segments:
- Community Banking Retail and Consumer Finance (comprising 43.9% of total revenue in 2017) provides a wide range of loan and deposit products, payment services, bankcard products and other financial services.
- Community Banking Commercial (22.5%) offers a wide range of loan and deposit products and connects the client with the combined organization’s broad array of financial services to large, medium and small business clients.
- Financial Services and Commercial Finance (16.7%) provides personal trust administration, estate planning, investment counseling, wealth management, asset management, corporate retirement services, capital markets and corporate banking services, specialty finance and corporate trust services.
- Insurance Holdings and Premium Finance (16.4%) provides property and casualty, employee benefits, life insurance surety coverage and title insurance. Also, the segment offers commercial and retail insurance premium finance.
- Others, Treasury and Corporate (0.5%) is the combination of the Other segment that represents operating entities that do not meet the quantitative or qualitative thresholds; Treasury function and the corporate support functions.
Additional information on BB&T is available on its website:
Key investment considerations identified by the firms are as follows:
Key Positives / Key Negatives- Strong capital position and improved credit quality will help the market share to grow.
- A diversified business mix will keep earnings stable.
- Loan and deposit growth, along with increased focus on fee-based income,will help improve the top-line.
- Strong balance sheet will aid organic expansion.
- Improving rate-scenario along with asset-mix changes will ease margin pressure.
- Acquisitions and branch expansion initiatives will boost bottom-linegrowth and further enhance market share.
- As the company derives majority of its earnings from lending activities, there are risks related to credit losses.
- A large number of loans exposed to higher-risk loan categoriesremains a headwind.
- Elevated expense level will continue to hamper bottom-line growth.
Note:BB&T operates on a calendar-year basis.
May 18, 2018
Long-Term Growth
BB&T is viewed as a conservatively managed regional bank with a long history of acquisitions.Since 1995, the companyhas completed several whole-bank acquisitions.Additionally, the company has acquired several insurance agenciesand non-bank financial services over the years.
Nevertheless, BB&T has been able to avoid subprime real estate exposure, leverage loans and wholesale/broker channel exposure (problems that some of the peers have experienced).Also, it has maintained a track record of being a conservative underwriter and risk manager of consumer and commercial real estate.
Although regulations are expected to ease gradually, BB&T still believes it will be difficult for smaller institutions to make the kind of adjustments to their cost and revenue structure that the bigger banks will be able to do. Also, the company believes there will be substantial consolidation in the financial sector. Going forward, management intends to take a break from large acquisitions and primarily focus on reaping benefits from the acquisitions completed in the recent past.
Additionally, BB&T has picked up its investment spending in both infrastructure and technology in conjunction with its acquisitions.One of the top priorities of the company is to enhance its operating efficiency over the longterm. The firms believe that expense control will likely be an incremental earnings driver, given the pressure on the revenue front.
BB&T has been continuously focusing on the growth of non-interest revenues(nearly 41% of total tax equivalent revenuesin1Q18) as these are less susceptible to the volatility of capital markets.Moreover, the financial reform measures are mostly directed toward capital market-related businesses. Hence, with BB&T having less exposure in these areas, the firms believe that the overall impact of the reforms would be insignificant on the company’s revenues. This will differentiate it fromits peers going forward.
May 18, 2018
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 57.9%↑
Neutral / 42.1%↓
Negative / 0.0%
Average Target Price / $57.62↑
Maximum Upside from Current Price / 14.7%
Minimum Upside from Current Price / -10.8%
Upside from Current Price / 4.9%
Digest High / $63.00↑
Digest Low / $49.00
No. of Analysts with target price/Total / 17/19
Risks to the price target include weakening credit quality; negative impact from persistent low interest rates; a large merger; sluggish loan growth; increasing competition, integration risks related to recent acquisitionsand new regulatory actions.
Recent Events
OnApr 19, 2018, BB&T announced 1Q18 results. Adjusted earnings of 97 cents per share outpaced the Zacks Consensus Estimate of 92 cents. The figure recorded 31.1% surge from the year-ago quarter.
Results reflected a slight rise in revenues and lower operating expenses. However, higher credit costs and a decline in loan balance were the undermining factors.
After considering merger-related and restructuring charges, net income available to common shareholders was $745 million or 94 cents per share, up from $378 million or 46 cents per share reported in the prior-year quarter.
Revenues
Total revenues(taxable equivalent basis) amounted to$2.83billion in 1Q18,up 0.6% y/y.The rise was primarily driven by increase in net-interest income and non-interest income.
Net interest income(NII),on a taxable equivalent basis,was$1.66billion,up 0.4%y/y.
Net interest margin (NIM) on a taxable equivalent basis was 3.44%,down 2 basis points (bps) y/y.
Provision for credit losses totaled$150 million, up1.4%y/y.
Total non-interest incomewas $1.18billion,up0.8% y/y.Higher investment banking and brokerage fees and commissions, and bankcard fees and merchant discounts were partly offset by decline in insurance income and mortgage banking income.
Outlook
On a sequential basis, management projects GAAP NIM in 2Q18 to be stable y/y,while core margins are expected to increase. Further, non-interest income is anticipated to increase 2-4% y/y.
Management expects revenues (tax-equivalent basis) to be up in the 2-4% range y/y in 2018. This includes the impact of Regions Insurance in 2H18.
Margins
Non-interest expensestotaled $1.69billionin 1Q18, down 19.8%y/y.The decrease was mainly due to lower outside IT services costs and net merger-related and restructuring charges, as well as absence of loss on early extinguishment of debt.
Outlook
Excluding merger-related and restructuring charges, and other one-time items, management expects expenses in 2Q18 to decline 1-3% y/y. Also, in 2018, expenses are anticipated to remain stable or reduce by 1% as compared with2017 on account of expense-control initiatives and the reduction in FDIC surcharges in 4Q17.
Management expects the effective tax rate to be 21% in 2Q18 and20-21% in 2018.
Earnings per Share
Net income available to common shareholders(GAAP basis) came in at $745 million or 94 cents per share in 1Q18 compared with $378 million or 46 cents per share in 1Q17.
Excluding merger related and restructuring charges, net income available to common shareholders was $767 million or 97 cents per sharein 1Q18, up from $611 million or 74 cents per share in 1Q17.
Outlook
Some of the firms have lowered their2018 EPS estimates on assumptions of higher loan loss provisions and to reflect inclusion of the Regions Insurance Group acquisition.
However, some other firms increased their 2019 EPS estimateson expectations of lower non-interest expense growth.
Balance Sheet/Capital Structure/Other
Balance Sheet
Total depositswere $158.19 million as of Mar 31, 2018, down 2.6% y/y.
Total loans and leases held for investmentwere $143.01 million, slightly up y/y.As ofMar 31, 2018, loans held for saletotaled$1.19billion, down7.7% y/y.
Outlook:On an annualized basis, management expects total average loans to grow 1-3% sequentially in 2Q18. In 2018, total average loans are projected to rise in the range of 1-3%y/y.
Asset Quality
Total nonperforming assets (NPAs)were $669 million as of Mar 31, 2018, down 16.5% y/y.Total performing troubled debt restructurings (TDRs)decreased nearly12.1% y/y to $1.04billionas ofMar 31, 2018.
Loans 30-89 days past due,including government-guaranteed GNMA mortgage loans, increased 1.1% y/y to $814million as ofMar 31, 2018. Loans 90 days past due and still accruingwere $490 million as ofMar 31, 2018, down9.6% y/y.
Further, in 1Q18, net charge-off(NCO) ratecame in at0.41% of average loans and leases, down1 bp y/y.Also, allowance for loan and lease losses was 1.05% of loans and leases held for investment, up 1 bp from the prior-year quarter.
Outlook:Management projects NCOs in the range of 35-45 bps in 2Q18 on the assumption that there is no deterioration in the economy.
Capital Structure
Tier 1 risk-based capital ratioof 12%remained flat y/y.
As ofMar 31, 2018, total risk-based capital ratio was14.0%, down from 14.1% as of Mar 31, 2017. Leverage ratio was 9.9% as ofMar 31, 2018, down from 10.0% as of Mar 31, 2017.
Under Basel III, BB&T’s Tier 1 common equity ratio(on a fully phased-in basis) was estimated to be 10.2% as of Mar 31, 2018.
As of Mar 31, 2018, Liquidity Coverage Ratio (LCR) was approximately144%.
Acquisition
On Apr 6, 2018, BB&T through its wholly owned subsidiary, BB&T Insurance Holdings, Inc., announced a deal to acquire Regions Insurance Group. The financial terms of the transaction were not disclosed. Notably, Regions Insurance Group is a subsidiary of Regions Financial Corporation.
The deal, expected to close in 3Q18, is still subject to regulatory approval and customary closing conditions.
Benefits & Other Details
Regions Insurance, providing property and casualty insurance and employee benefits products, serves more than 60,000 clients across the Southeast, Texas and Indiana through its 30 offices.
The transaction will further strengthen BB&T’s wholesale and retail insurance channels. Following the closure of the deal, the company expects nearly 50% of insurance brokerage revenues to come from BB&T Insurance's retail network. Additionally, the company’s annual insurance brokerage revenues will likely increase to roughly $2 billion.
BB&T's chairman and CEO, Kelly S. King said, “Regions Insurance significantly adds to our retail insurance network providing us the opportunity to further build out our footprint in core BB&T markets across the Southeast.” Further, the deal strengthens BB&T’s position as the 5th largest insurance broker in the United States and globally.
As part of the deal, the president and CEO of Regions Insurance, Rick Ulmer, as well as other associates will join BB&T Insurance’s senior leadership and other positions.
Capital Deployment Activities
In 1Q18, BB&T repurchased $320 million worth shares. This was part of the company’s 2017 capital plan.Notably, for 2Q18, it has $320 million remaining in share repurchases authority.
On Apr 24, 2018, BB&T announced a quarterly dividend of 37.5 cents per share, marking an increase of 13.6% from the prior payout. The dividend will be paid on Jun 1to shareholders on record as of May 11, 2018.
OnMar 1, 2018, BB&T paid a quarterly dividend of 33 cents per shareto shareholders on record as of Feb 9, 2018.
Outlook: Some of the firms believe BB&T’s funding of Regions’ insurance business buyout from its CCAR allotment will result in slight reduction in share buybacks and capital returns in 2Q18.
Others
On Mar 21, 2018, BB&T increased its prime lending rate to 4.75% from 4.50%.
May 18, 2018
Coverage Team / 11AQCA / Kalyan Nandy
Lead Analyst / Swayta D.Shah
Analyst / Devyani Chamria
Copy Editor / Deblina Halder
Content Ed. / Swayta D.Shah
No. of brokers reported/Total brokers / 19/19
Reason for Update / Earnings
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