DBRS: BB&T’s 3Q14 Underlying Earnings and Fundamentals Remain Solid, Excluding Some Non-Core Items

Summary:
• 3Q14 earnings to common shareholders of $520 million, up 22.3% from $425 million for 2Q14, reflecting some non-core items.
• Balance sheet fundamentals remain solid, including sustained broad-based average loan growth.
• DBRS, Inc. (DBRS) rates BB&T Corporation’s Issuer & Senior debt at A (high) with a Stable trend.

BB&T Corporation (BB&T or the Company) reported net income available to common shareholders of $520 million for 3Q14, up from $425 million for 2Q14. Higher quarter-on-quarter (QoQ) earnings reflected several non-core items. Specifically, in 3Q14, the Company reported a sizable gain related to loan sales, a loss on early extinguishment of debt, and a tax benefit related to a tax position under examination. Meanwhile, in 2Q14, BB&T’s earnings reflected reserves established for FHA–insured loans. On an adjusted basis, excluding non-operating items, BB&T’s core earnings, or income before provisions and taxes (DBRS calculated), remained stable QoQ.

Despite a five bps narrowing of net interest margin (NIM) to 3.38%, spread income increased modestly sequentially due to broad-based average loan growth (up 1.4%; excluding covered loans), led by higher levels of direct retail, sales finance, commercial real estate and commercial and industrial loans. Excluding the 3Q14 sale of $550 million of residential mortgages (mostly performing troubled debt restructuring), average loan growth would have been greater. Meanwhile, despite a seasonal decline in insurance income, adjusted fee income (excludes non-core items) remained solid sequentially. Positively, most fee line items improved QoQ, led by higher levels of mortgage banking income and deposit service charges.

Expenses remain well managed, as adjusted expenses, excluding non-core items, increased modestly QoQ. DBRS notes that personnel expense declined by 1.7% sequentially, driven by a lower level of full-time equivalent employees and lower equity-based compensation for retirement eligible employees.

Overall, BB&T’s balance sheet fundamentals remain solid. Specifically, the company reported sound and improving asset quality, underpinned by decreasing sequential non-performing assets and low net charge-offs, a solid capital position reflecting a Basel III common equity Tier 1 ratio of 10.3%, and solid funding and liquidity profiles.

DBRS rates BB&T Corporation Issuer & Senior debt at A (high) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.