DBRS Comments on BB&T Corporation’s 2Q13 Results: Ratings Unchanged – Senior at A (high), Stable

DBRS, Inc. (DBRS) has today commented that the ratings of BB&T Corporation (BB&T or the Company), including its Issuer & Senior debt rating of A (high) are unchanged following the release of 2Q13 results. The trend on all ratings is Stable. BB&T reported net income applicable to common shareholders of $547 million for the quarter, up from $210 million for 1Q13 and $510 million for 2Q12. The linked-quarter increase in earnings mostly reflected the non-recurrence of a 1Q13 $281 million adjustment related to an unresolved disputed tax liability, higher insurance revenues, and lower provisions for loan loss reserves.

During 2Q13, the Company exhibited sound balance sheet fundamentals, including loan growth, improved asset quality, a solid liquidity profile, and an enhanced capital position. Furthermore, the Company continues to strengthen its franchise, including the measured build-out of corporate banking into key national markets, and expansion of wealth management. Nonetheless, DBRS notes that BB&T’s ratings remain under pressure, due to the Company’s disclosure in its 2012 10-K of an adjustment to risk-weighted assets, which reflects weaknesses in its internal controls. Moreover, the Federal Reserve objected to BB&T’s capital plan, based on a qualitative assessment, which the Company recently resubmitted. DBRS notes that any additional evidence of weakness within the Company’s internal controls or reporting functions could result in negative rating actions.

On a linked-quarter basis, BB&T’s total revenues increased by 1.6% to $2.5 billion, driven by a 4.5% increase in non-interest income to $1.0 billion, partially offset by a modest 0.5% decline in net interest income to $1.4 billion. The increase in non-interest income was broad-based and reflected higher levels of insurance income (up 16.7%), bankcard fees and merchant discounts (up 10.2%), investment banking/brokerage fees/commissions (up 5.3%), and service charges on deposits (up 3.6%). The sizable increase in insurance revenues was driven by firming market conditions and a $13 million premium refund.

Lower QoQ net interest income reflected a moderate 6 basis point narrowing of net interest margin (NIM) to 3.70%, which more than offset a 0.4% increase in average earning assets. Overall, the narrower NIM was negatively impacted by the continued runoff of the Company’s covered assets, lower earning asset yields, and tighter credit spreads on retail production. As with most banks, the steeper interest rate yield curve should benefit BB&T’s spread income over time. During 2Q13, the Company’s average loans held for investment increased by 3.8% (annualized), which drove higher average earning assets. Overall, loan growth mostly reflected higher levels of sales finance loans (up $682 million), commercial & industrial loans (up $443 million) and loans from other lending subsidiaries (up $419 million).

Pressuring the Company’s bottom line, expenses increased 5.8% QoQ to $1.5 billion. Higher expenses reflected some non-core items including $27 million of net merger related/restructuring charges and $35 million in systems and special project costs. Furthermore, higher expenses reflected a $27 million, or 3.3%, increase in personnel expense. DBRS notes that the merger expense/restructuring charge was primarily related to the Community Bank reorganization. Higher personnel costs reflected an increase in production related incentives and commissions, equity-based compensation for retirement eligible employees and merit increases for officers.

BB&T’s asset quality continued to improve and reflected lower levels of net charge-offs (NCOs), non-performing assets (NPAs) and early stage delinquencies. Specifically, NCOs (excluding covered assets) declined to 0.75% of average loans for 2Q13, from 0.98% for 1Q13. Meanwhile, NPAs decreased to a manageable 1.10% of loans (excluding covered assets) at June 30, 2013, from 1.23% at March 31, 2013. Finally, BB&T’s loan loss reserves remain adequate, at 1.55% of loans held for investment. DBRS anticipates continuing improvement in BB&T’s asset quality over the intermediate term.

The Company continues to maintain a solid funding profile which is underpinned by a large core deposit base. Although average deposits decreased 1.4% (annualized), QoQ, the mix improved, as non-interest bearing deposits increased by 13.2% (annualized), and certificates and other time deposits declined by 12.5% (annualized). A good quality securities portfolio representing 21.0% of total assets, access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

BB&T’s capital position remains sound, and benefited from the 2Q13 issuance of $500 million of Tier 1 qualifying non-cumulative perpetual preferred stock as well as retained earnings. At June 30, 2013, the Company’s estimated risk-based capital ratios were improved, including its Tier I ratio of 11.3% (10.8% at March 31, 2013), Total ratio of 14.1% (13.7% at March 31, 2013), and Tier 1 common equity ratio of 9.4%. Finally, BB&T estimates its Tier I common ratio under Basel III to be 9.0%, as of June 30, 2013.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]