DBRS Ratings on BB&T Corporation Unchanged after 2Q12 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 2Q12 results. The trend on all ratings is Stable. BB&T reported net income applicable to common shareholders of $510 million for 2Q12, up from $431 million for 1Q12.

Despite the difficult business environment, BB&T’s higher 2Q12 earnings reflect positive balance sheet fundamentals and revenue contributions from its recent insurance business acquisition. Specifically, higher QoQ earnings reflect a 5.2% increase in total revenues and a 5.2% decline in provisions for loan loss reserves, partially offset by a 2.9% increase in noninterest expense. Higher revenues were attributable to a 10.9% increase in noninterest income and a 1.8% increase in net interest income.

Higher spread income reflected continued loan growth and the benefit from the accelerated amortization of deferred hedge gains resulting from the announced redemption of the Company’s trust preferred securities. Specifically, the increase in net interest income was attributable to a 1.2% increase in average earning assets along with a 2 basis point (bp) widening of net interest margin (NIM) to 3.95%. Excluding the impact of the accelerated amortization of deferred hedge gains, BB&T’s NIM narrowed 6 bps to a still strong 3.87%. Meanwhile, the increase in average earning assets reflected a 1.6% expansion in loans (held for investment) and a 1.4% increase in securities. Excluding the Company’s covered loan portfolio, loans increased 2.1% QoQ, driven by higher levels of residential mortgage, direct retail, commercial & industrial, sales finance and revolving credit loans. 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. Higher QoQ fee income was mostly driven by a $122 million, or 45% increase in insurance income, reflecting its recent acquisition of two insurance divisions from the Crump Group Inc. Furthermore, higher insurance income was driven by improved market conditions and seasonality. To a lesser degree, higher fee income reflected increases in deposit service charges, checkcard and bankcard fees.

DBRS views BB&T’s expenses as well managed. Higher 2Q12 expenses were mostly driven by the Crump acquisition, as personnel expense increased by 6.1% during 2Q12. Positively, foreclosed property expense declined 21.7%, sequentially, driven by lower levels of inventory.

Despite the pressure of the slow growth economic environment, BB&T’s asset quality continues to improve. Indeed, NPAs decreased to 1.72% of loans (excluding covered loans) at June 30, 2012, down from 2.12% at March 31, 2012. Meanwhile, net charge-offs (NCOs: excluding covered loans) decreased to 1.22% of average loans for 2Q12, from 1.28% for 1Q12. Finally, BB&T’s loan loss reserves remain ample, at 1.86% of loans held for investment.

BB&T’s solid funding profile is underpinned by its large core deposit base. During 2Q12, average deposits increased by 0.6%, and the mix improved, as noninterest bearing, checking and money market & savings deposits increased, while time deposits declined. The Company’s good quality securities portfolio, which represents 21% of total assets, access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

BB&T’s capital position remains healthy despite the impact of the aforementioned acquisition and the announced redemption of the trust preferred securities. At June 30, 2012, the Company’s tangible common equity ratio was 6.9%, Tier 1 risk-based capital ratio was 10.2% and Total risk-based capital ratio was 13.5%. Under the Basel III rules, the Company’s Tier 1 Common ratio is approximately 8.2%.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. 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: Alan G. Reid
Initial Rating Date: 19 December 2005
Most Recent Rating Update: 2 May 2012

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