DBRS Ratings on BB&T Corporation Remain Unchanged after 3Q12 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 3Q12 results. The trend on all ratings is Stable.

Reflecting some noise, BB&T reported net income applicable to common shareholders of $469 million for 3Q12, down 8.0% from $510 million for 2Q12. The lower earnings reflected elevated expenses, mostly driven by one-time items, including a merger/restructuring charge related to the BankAtlantic acquisition (closed on July 31, 2012) and a sizable one-time loan processing expense. Partially offsetting these headwinds, the Company reported slightly higher revenues and lower credit costs, Specifically, lower quarter-over-quarter (QoQ) earnings, reflected a 7.2% increase in noninterest expense, partially offset by a 0.74% increase in total revenues and a 10.6% decline in provisions for loan loss reserves.

Importantly, balance sheet fundamentals were favorable in 3Q12. Specifically, the Company’s average loans (excluding covered loans) grew 12.6%, on an annualized basis (8.4% excluding BankAtlantic), while average deposits grew 10.6% annualized (3.3% excluding BankAtlantic). Furthermore BB&T’s asset quality continued to improve, as the Company reported lower levels of nonperforming assets (NPAs) and net charge-offs (NCOs).

Higher QoQ expenses reflected the impact of the BankAtlantic acquisition, which included a $43 million (pre-tax) merger-related charge in 3Q12. Additionally, the layering in of the BankAtlantic expense base added $10 million to personnel expense, which was up 22%, QoQ. Furthermore, higher 3Q12 expenses reflected a one-time $28 million (pre-tax) loan processing expense and $17 million increase in other post-employment benefits expense.

Moderately higher revenues were attributable to a 1.4% increase in net interest income, somewhat offset by a 0.3% decrease in noninterest income. Higher spread income, on a linked-quarter basis, reflected a 1.0% increase in average earning assets, partially offset by a 1 basis point (bp) narrowing of NIM to 3.94%. Excluding the accretion related to the Colonial Bank acquisition, BB&T’s core NIM widened 6 bps to a solid 3.51%. The wider core NIM reflected the full impact of the recent redemption of trust preferred securities and a more favorable funding mix shift. Somewhat offsetting these favorable headwinds, were lower earning asset yields. Meanwhile, higher average earning assets reflected a sizable 3.2% increase in average loans (held for investment), partially offset by 5.0% decrease in securities.

Modestly lower fee income resulted from a $60 million, or 15.3%, decrease in insurance income, which was a seasonal decline. In general, most of the other fee income categories increased QoQ, including mortgage banking income (up 15.9%) and deposit service charges (2.9%). Improved mortgage banking income reflected higher production and margin.

Despite the difficult business environment, BB&T’s asset quality continues to improve. Indeed, NPAs decreased to 1.51% of loans (excluding covered loans) at September 30, 2012, from 1.72% at June 30, 2012. Meanwhile, NCOs (excluding covered loans) declined to 1.08% of average loans for 3Q12, from 1.22% for 2Q12. Finally, BB&T’s loan loss reserves remain adequate, at 1.73% of loans held for investment.

BB&T’s solid funding profile is underpinned by its large core deposit base. During 3Q12, the deposit mix improved, as average noninterest-bearing deposits increased by 8.5%, while certificates and other time deposits decreased by 1.5%. The Company’s good quality securities portfolio, which represents 20% 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. At September 30, 2012, the Company’s tangible common equity ratio was 6.8%, and its regulatory capital ratios are comfortably above well capitalized levels with a Tier 1 risk-based capital ratio of 10.9% and Total risk-based capital ratio of 14.0%. DBRS notes that regulatory ratios reflect the 3Q12 issuance of $1.2 billion of Tier I qualifying non-cumulative perpetual preferred stock. Finally, under the Basel III rules, the Company’s Tier 1 Common ratio is approximately 8.0%.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 19 December 2005
Most Recent Rating Update: 23 February 2012

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