DBRS Confirms BB&T Corporation’s Senior Debt at A (high); Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of BB&T Corporation (BB&T or the Company), including its Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (low). All ratings remain on Stable trend. The rating action follows a detailed review of the Company’s operating performance, financial fundamentals, and future prospects.

The ratings confirmation and Stable trend reflect BB&T’s well established, super-regional banking franchise, which is underpinned by the sixth largest branch network in the United States. The ratings also consider the Company’s sound asset quality, solid funding and liquidity position, healthy capital, and pressured yet resilient earnings generation capacity.

Nonetheless, DBRS notes that BB&T’s ratings are under pressure. The Company’s recently disclosed adjustment to risk-weighted assets reflects weakness in its internal controls (please view DBRS’s press release dated March 5, 2013). Importantly, DBRS notes that BB&T has placed considerable resources into strengthening its internal controls and reporting processes, which should benefit the Company going forward. Reflecting the risk-weighting adjustment, the Federal Reserve objected to BB&T’s capital plan, based on a qualitative assessment, which the Company has recently re-submitted. DBRS notes that any additional evidence of weakness within the Company’s internal controls or reporting functions could result in negative rating actions.

Underpinning BB&T’s ratings is its large, well-entrenched community banking franchise with a footprint located within the geographically appealing Mid-Atlantic and Southeastern states, Texas, and the District of Columbia. The Company has a top-tier and defensible deposit franchise that provides a broad range of lending and fee-based products and services to its customers.

Positively, BB&T’s asset quality continues to improve, despite the difficult operating environment. Indeed, non-performing assets (NPAs) decreased 37% over the last four quarters, and represented 1.23% of loans and OREO at March 31, 2013. Although mostly C&I and CRE loans, the decline was broad-based. Meanwhile, net-charge-offs continue to track in the right direction and represented 0.98% of average loans in 1Q13, down from 1.04% in 4Q12, and 1.28% in 1Q12. Perhaps signaling continuing improvement in asset quality, new NPA formation was down in 1Q13, on a YoY basis, and in 2012, as compared to 2011. DBRS notes BB&T’s level of loan loss reserves remain acceptable, given current loss rates, and represented 1.65% of total loans held for investment (excluding covered assets) and 143% of nonperforming loan (as of March 31, 2013). That said, DBRS is mindful that the Company’s $272 million quarterly provision for loan loss reserves was a relatively high 27% of adjusted quarterly core earnings

Although pressured by the difficult operating environment, BB&T’s adjusted IBPT remains resilient. Overall, the Company’s earnings capacity reflects a moderating net interest margin (NIM), pressured loan growth, a sizable fee income component, and a well-managed expense base. Benefitting from accretion related to acquired loans, BB&T’s NIM was a high 3.76% (TE basis) for 1Q13, down from 3.84% for 4Q12 and 3.93% for 1Q12. The narrower sequential NIM was due to decreases in both yields on new loans and balances of covered assets. Providing support to earnings, fee income represented a high 41% of total revenues (adjusted basis) for 1Q13. Historically, the Company’s fee income component has hovered from the high 30% to low 40% range.

BB&T’s funding profile remains solid, as core deposits fully fund net loans. Overall, deposits increased 5.8% over the past year. Moreover, the mix has improved, with non-interest bearing demand deposits increasing by 21.3%, while time deposits have declined by 2.7%. The Company’s good quality securities portfolio, access to the Federal Home Loan Bank and Federal Reserve, round out its liquidity profile. As with most banks, the securities portfolio has extension risk, which DBRS will continue to monitor.

Even with the recent adjustments made to its risk-weighted assets, BB&T’s capital profile remains sound and provides solid loss absorption capacity. At March 31, 2013, the Company’s Tier 1 common ratio was 9.2% and Total risk-based capital ratio was 13.6%. Moreover, under Basel III rules, BB&T’s estimated Tier I common ratio was 7.8%.

BB&T Corporation, a bank holding company headquartered in Winston-Salem, North Carolina, reported $180.8 billion in assets at March 31, 2013.

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, DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used]

The sources of information used for this rating include publicly available company documents, the Federal Deposit Insurance Corporation, 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
Committee Chair: William Schwartz
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.