DBRS: BB&T’s 1Q Results Down QoQ On Seasonality & Higher Pension Expense; Record Insurance Income

Summary:
• 1Q15 earnings to common shareholders of $448 million, down 11.4% sequentially, and down 1.6% year-over-year (YoY).
• The decline in earnings quarter-on-quarter (QoQ) reflected seasonally higher payroll taxes, an increase in pension costs, the non-recurrence of 4Q14 franchise tax benefits, and higher provisions for loan losses.
• DBRS rates BB&T Corporation Issuer & Senior debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views BB&T Corporation’s (BB&T or the Company) 1Q15 results as sound, despite typical seasonality, and the challenging operating environment. The Company’s 1Q15 results reflected record insurance income, average loan growth, sound and improving asset quality, and solid funding and capital profiles.

During 1Q15, spread income dipped modestly, driven by pressured net interest margin, partially offset by average earning asset growth. Meanwhile, despite a record level of insurance income in the quarter, non-interest income was moderately down QoQ, primarily due to lower levels of investment banking and brokerage fees, and mortgage banking income. Finally, expenses remain well managed, yet were up QoQ, reflecting a seasonal increase in payroll taxes, along with an increase in pension expense. Higher expenses also reflected the non-recurrence of 4Q14 benefits for franchise taxes and insurance associated expense. During the quarter, BB&T’s expenses also benefited from a decrease of approximately 150 full time equivalent employees.

Loan growth remains pressured by the Company’s decision to sell all of its conforming residential mortgage loan production, as well as significant competition for quality loans. Nonetheless, and excluding residential mortgages, the Company reported average loan growth of 5.4% (annualized), led by higher levels of commercial and industrial loans, and to a lesser extent higher sales finance loans and direct retail loans. Positively, the Company expects loan growth in the 7.0% (annualized) to 9.0% range in 2Q15, excluding residential mortgage loans.

Balance sheet fundamentals remained solid. Indeed, the Company reported sound and improving asset quality, underpinned by decreasing levels of non-performing assets and low net charge-offs, a solid capital position reflecting an estimated Basel III common equity Tier 1 ratio of 10.3% (fully-phased in basis), and solid funding and liquidity profiles. BB&T’s 1Q15 liquidity coverage ratio was approximately 130%, and well above the regulatory minimum requirement of 90% by January 1, 2016. Finally in March 2015, The Federal Reserve did not object to the Company’s capital plan, which includes a proposed increase in the quarterly dividend of 12.5% to $0.27. Other components of the plan include the recently closed Citi Texas branches, and the still pending acquisitions of The Bank of Kentucky and Susquehanna Bancshares Inc., as well as cumulative share buybacks of up to $820 million through 2Q16.

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.