DBRS Ratings on BB&T Corporation Unchanged after 1Q12 Results – Senior: A (high), Stable

DBRS, Inc. (DBRS) has commented today that its ratings for BB&T Corporation (BB&T or the Company), including its A (high) Issuer & Senior Debt rating, are unchanged following the release of 1Q12 results. The trend on all ratings is Stable. BB&T reported net income applicable to common shareholders of $431 million for 1Q12, up from $391 million for 4Q11.

BB&T’s earnings generation continues to track in the right direction. Higher QoQ core fee income, which excludes securities gains/losses, reflected positive growth across multiple business lines, especially within the insurance business. Furthermore, the outsized costs associated with BB&T’s aggressive OREO reduction strategy have moderated. Although BB&T’s net interest margin (NIM) narrowed during 1Q12, this was offset by the Company’s sustained broad-based loan growth leading to relatively stable QoQ spread income. Nonetheless, as with most banks, regulatory headwinds and the slow growth economic environment continue to pressure earnings.

During 1Q12, the Company’s spread income was relatively stable QoQ, reflecting a 2.1% increase in average earning assets, offset by a 9 basis points narrowing of net interest margin (NIM) to a still high 3.93%. The narrower NIM was mostly attributable to the run-off of the Company’s covered loan portfolio. Going forward, DBRS expects further margin pressure, especially given the continuing run-off of this portfolio. Nonetheless, NIM compression should be moderated by declining deposit costs and an improved funding mix. Higher average earning assets reflected an increase in the Company’s securities portfolio along with solid loan growth (up 6.4% annualized), especially within the commercial & industrial, mortgage, direct retail and sales finance portfolios. DBRS notes that the Company’s riskier ADC loan portfolio continues to run-off.

BB&T’s earnings continue to benefit from its broad and deep menu of fee-based products and services. Core fee income improved QoQ, driven by the Company’s insurance, mortgage banking and investment banking/brokerage businesses. Specifically and excluding non-core securities gains and losses ($9 million in losses in 1Q11 and $103 million in gains during 4Q11), fee income on a linked-quarter basis increased a strong 7.5% to $880 million.

Expenses were down significantly QoQ due mostly to lower foreclosed property expenses, which declined to $92 million for 1Q12 from $346 million in 4Q11. Although personnel expense increased 7.5% during the quarter, due to higher payroll tax, pension and other post-employment expense, most other expense categories declined.

Asset quality continues to improve despite macroeconomic headwinds. Positively, nonperforming assets (NPAs) declined for the eighth consecutive quarter. Moreover, during the quarter, early stage delinquencies and watch list loans declined, indicating future credit quality improvement.

The Company’s NPAs contracted to 2.12% of loans (excluding amounts related to covered loans) at March 31, 2012, from 2.29% at December 31, 2011. Meanwhile, net charge-offs (NCOs: excluding FDIC covered loans) decreased to 1.28% of average loans for 1Q12, from 1.46% for 4Q11. Finally, the Company’s loan loss reserves remain adequate. At March 31, 2012, BB&T’s allowance for loan and lease losses represented 1.97% of loans held for investment.

BB&T’s solid funding profile is underpinned by a large core deposit base. During 1Q12, BB&T’s average total deposits grew 8.8% (annualized) driven by a 15.3% increase in non-interest bearing deposits, a 7.9% increase in money markets and savings, and a 8.1% increase in certificates and other time deposits. The Company’s good quality securities portfolio, which represents 22% of total assets, access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

BB&T maintains a healthy capital position, which provides sound loss absorption capacity. At March 31, 2012, the Company’s tangible common equity ratio was 7.1%, and Tier 1 common ratio was 10.0%. DBRS notes that BB&T anticipates meeting the Basel III requirements. The Company’s estimated Tier I common ratio under Basel III is 9.2%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 19 December 2005
Most Recent Rating Update: 15 November 2010

For additional information on this rating, please refer to the linking document under Related Research.