DBRS Comments on BB&T Corporation’s 3Q13 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 3Q13 results. The trend on all ratings is Stable. BB&T reported net income available to common shareholders of $268 million for the quarter, down from $547 million for 2Q13 and $469 million for 3Q12. Earnings would have been $503 million, excluding a $235 million tax adjustment primarily related to an adverse legal ruling.

Highlights of the quarter include loan growth, strong improvements in asset quality that contributed to a much lower provision for credit losses, lower expenses, a stabilizing net interest margin, and stronger capital metrics. Nonetheless, lower mortgage and seasonally lower insurance revenues, and the absence of securities gains in 3Q13 resulted in total revenues declining 5.6% to $2.3 billion. Positively, management expects positive operating leverage and an improved efficiency ratio in 4Q13.

Average loans grew 3% on an annualized basis despite a sizeable decline in mortgage warehouse lending primarily reflecting growth in other lending subsidiaries, sales finance, direct retail lending, and revolving credit. Early in 4Q13, the Company noted that it sold a consumer lending subsidiary with approximately $500 million of loans to optimize its loan mix in the short-term and redeploy the capital over the long-term. Meanwhile, average deposits declined in the quarter, but the mix continued to improve with non-interest bearing deposits growing 7.8% annualized, while certificates and other time deposits declined by 35%. Management expects continued non-interest bearing deposit growth in 4Q13.

The loan growth was able to offset modest margin compression resulting in relatively stable net interest income, which increased by $2 million to $1.417 billion. Specifically, the Company’s net interest margin was relatively stable declining just two basis points to 3.68% benefiting from positive adjustments to yields in the securities portfolio. BB&T expects further margin compression in the range of 5-10 bps in 4Q13 primarily from the sale of the subsidiary, which had higher yielding loans.

Insurance income decreased $71 million sequentially to $355 million driven by seasonality. When compared to 3Q12, insurance income increased 6.6%. Mortgage banking income was down by $51 million to $117 million reflecting both lower margins and production from reduced demand. Importantly, BB&T’s core fee income comprised a high 41.6% of total revenues, which supports the rating.

Reflecting lower personnel and restructuring costs, noninterest expenses declined by 6.6% annualized to $1.47 billion. Professional services expenses related to systems and project-related costs remained elevated. The Company noted that the project-related costs should go away shortly, but some systems-related costs could persist for several years until the old duplicate system can be eliminated. Overall, the efficiency ratio increased to 60.1% in the quarter from 57.6% in 2Q13 driven by lower revenues. BB&T continues to target an efficiency ratio in the mid-50% range, which requires revenue growth.

Asset quality, excluding covered loans, continues to improve with delinquencies, nonperforming assets (NPAs) and net charge-offs (NCOs) all declining during the quarter. Specifically, NPAs declined $114 million, or 8.9%, to their lowest levels as a percentage of total assets since 2007. Meanwhile, NCOs were 0.49% of average loans and leases, an improvement from 0.75% in 2Q13 and below the Company’s normalized charge-off guidance of 55 to 75 bps. Moreover, NCOs have declined by half since 1Q13. As a result, the loan loss provision has declined to $92 million from $168 million in 2Q13 resulting in a reserve release of $52 million. Even with the reserve release, BB&T’s allowance for loan and lease losses improved during the quarter to 1.66x nonperforming loans. Overall, the Company’s allowance for loan and leases losses remains sufficient at 1.59% of loans and leases held for investment. DBRS expects asset quality to continue to improve, albeit at a slower pace.

Positively, capital metrics all improved during the quarter and remain sound. Specifically, the Company’s tangible common equity to tangible assets ratio was 6.9%, up from 6.8%. BB&T noted that its common equity Tier 1 ratio under Basel III was approximately 9.0%. In August, the Federal Reserve did not object to BB&T’s revised capital plan that was submitted in June.

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

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