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BB&T Corporation (NYSE:BBT)

Citigroup US Financial Services Conference

March 05, 2013 10:30 am ET

Executives

Kelly S. King - Chairman, Chief Executive Officer, President, Member of Executive Committee, Member of Risk Management Committee, Chief Executive Officer of Branch Banking & Trust Company and Chairman of Branch Banking & Trust Company

Analysts

Keith Horowitz - Citigroup Inc, Research Division

Kelly S. King

Yes, specifics that we are focusing on now because as you know we're a values-driven, highly profitable regional growth organization. We've been, for a long time in our history, a lot of our growth was through mergers. We're good at mergers and we're still interested in mergers but frankly right now, we're more focused on organic growth, which is more controllable and ultimately, more profitable. Of course, our fundamental strategy is to deliver the best value preposition in the marketplace, understanding that value is a function of quality relative to price, and we focus on quality. And I'll show you a slide that indicates we continue to have a superior quality in the marketplace. Of course, our overarching purpose is to achieve our vision and our mission, consistent with our values. Ultimately, they're designed to optimize a long-term return to our shareholders.

So we have a Community Bank concept, 37 regions basically in the mid-Atlantic and Southeast, kind of jumping over to Texas. We try very hard to be in the top 5 in market share where we do business because density in our business does matter. As you can see from this slide, we're in pretty good shape. We've got a little bit of work to do in Maryland, got a long way to go in Texas, but we just kind of got started. And so it's a huge state and huge potential for us. But our Community Bank model has been in place for over 20 years, and it continues to deliver the most responsive client service quality.

So one of the big drivers for us is diversification. And if you kind of think about this great recession we just went through, we think there were 2 really big takeaways. One, is at the system level and frankly, at most company levels, there was really a failure to aggregate, integrate and correlate risk information. Said another way, people just didn't know what was going on, and so there are some big learnings and takeaway from that. But the other big takeaway is that the companies, the big companies, that got in trouble was they forgot the basic relationship between leverage and diversification. So if you're highly leveraged and you're highly concentrated, you're almost destined to have difficulties when that asset class has declined in value.

So for a long time and certainly now, we're really focused on diversification. That's why we continue to be, over the last 15 to 20 years, a diversified set of non-bank businesses to offset some of the cyclicality in the normal spread business. So as you can see, we have about a number of good businesses. For example, AFCO/CAFO, which is our Insurance premium finance business is a unique business. It's an Insurance premium financing. We're #1 in the United States, #1 in Canada.

Grandbridge is our commercial mortgage business. It's a national business for us and doing extremely well. Insurance is our largest noninterest business. We're 7th largest in United States in terms of insurance brokerage. I'll show you a slide on that in a little bit, but it's a very, very good business for us.

So the proof is whether or not that mix gives you a diversified revenue stream, which as you can see we do have. Our Community Bank gives us about 47% of our revenue stream. The Insurance is 14%. Financial Services, which is asset management and capital markets, Corporate Banking is 13%. Mortgage is about 12%. Specialized Lending businesses are 8%, and Dealer Financial Services are 6%.

So the idea is that if you have better value then that ought to give you more steady revenue streams through the course. You can see on the right that this has actually proven to be true for us. So through the last 5 years, through the cycle, our revenue growth has been 31.8% compared to the peer median of 7.4%, median being what it is. Some of our peers have actually seen a decline in revenue during that period of time. So we think that our revenue growing at a little over 4x our peer median is a substantial justification as to why we can claim that our revenue mix being balanced and diversified doesn't guarantee future steady growth in revenue, but it does portend that.

What we're really trying to do, from a shareholder point of view, is build long-term steady shareholder growth in asset value and in dividends. In order to have that, you got to have steady profits. In order to have that, you got to have steady revenues. In order to have steady revenues, you've got to have diversified businesses. And so that's why we pursue that strategy.

Now with regard to loan growth. Let me just make an overarching comment here. Remember for BB&T, the first quarter is a softer quarter for us because of the nature of our businesses. Some of these ones I just talked about, Insurance and AFCO and so forth, are very cyclical. So we always have a dip in the first quarter relative to the fourth and comes back strong in the second, so just kind of keep that in mind as you're thinking about our performance.

With regard to loan growth, clearly loan growth outlook for the first quarter has slowed. There are a number reasons for that. Part of that is normal and that we have this, as I just alluded to, seasonal decline in loans and some parts of our business. Mortgage Warehouse is down now because rates ticked up towards the first part of this quarter. And so that drooped volumes down some. But coming back now, the rates have dropped back down, but that's a fact that some of those specialized businesses are seasonal. And so we expect our loan growth on an average basis, probably be slightly down in the first quarter. We expect it to come back once we get past these first quarter headwinds and the second quarter in the 2% to 4% kind of range.

So what's really going on out there, we think, with regard to loan growth is that the market is very skittish. As we came through the fourth quarter, the fiscal cliff, all of the discussions that are going on in Washington today around sequestration, and now the upcoming budget talks is frankly, just leaving the business community very unsure. They're just very uncertain. And when you travel around and talk to them, they're not making the kind of investment decisions that they would like to make because of this uncertainty.

Now the flip of that is a very positive story, in that when they do finally resolve and get some positive leadership out of Washington and settle down on some of these issues, I personally believe there's a huge pent-up demand in the business community. There are -- a lot of people have not been making investments for 4 or 5 years that they need to make, and so we could see a really big boom and growth in the next several years, frankly, when we get these leadership issues resolved. So loan growth is challenging now. But we think that we have some things that I'll mention in a minute that will kind of help us compensate some for that.

Deposits have continued to be strong, not quite a strong as last year. Obviously, we've been growing on a really big base increase over the last few years, as loan demand has been relatively slow. Our deposit costs continue to come down. We continue to make improvements in our business mix. So we feel really good about our deposit strategy. So the key is when you're facing a relatively slow environment, which I think we would all agree is where we are, is do you sit back and just accept that, or do you try to develop strategies to mitigate that. We choose the latter. And so we are really focused on a number of key strategies that are going to help us do, we think, relatively better than the marketplace.

One is our Texas strategy. You recall a couple of years ago, we got into Texas through the Colonial acquisition, a really good base. We picked up really about $800 million on in deposits through that and virtually no loans. We ended last year at about $1.8 billion in loans and $1.2 billion in deposit. So we've already made really good head -- progress over there.

But we just launched a new very significant commercial de novo growth strategy in Texas, where we're adding between literally now and June or so, 30 new commercial de novo branches. They're relatively low cost because we've been able to acquire facilities that were already built and depreciated down. We've been able to hire really good talent locally. And to be honest with you, our value proposition is playing very well in Texas. When we first went, I wasn't sure, but then when I got down there, I realized that we kind of all talk the same, and we think the same from North Carolina to Texas. And it's kind of working out really good, to be honest. So Texas is just a phenomenal state, as you know, with 26.5 million people. It's a very pro-business state, a very fast-growing state, and we're very, very excited about that.

So that's a strategy to have a lot of opportunity for us as we go forward. Our capital market's Corporate Banking strategy, has an awful lot of potential. Recall that until recently, we have not really been in the large corporate national market, just kind of the way we grew up, and the mid-Atlantic and Southeast is kind of a smaller institution. As we got relatively larger fairly quickly, we saw that there was a really big opportunity in the national Corporate Banking market. Frankly, a number of players like Wachovia, First Union, Nat City went away. And so, there was a bit of a gap in the marketplace. So we've moved, over the last 3 years or so, to build up our capacity and pursue that market. We continue to pursue that very aggressively. We think it has a lot of legs.

As you can see there, the loans in that, over just the last 4 years, have gone up from a couple of billion to $6 billion, deposits have gone up from almost nothing to about $17 billion. So a huge amount of opportunity for us there. Our strategy is the same as it always is so we're not just buying packages. We're not just buying strips of loans on a national basis. We think that's too risky. Our strategy is feet on the ground, into Treasury, into the CEO's office, doing business like -- just like we always have a need. We just happen to be doing it in a different geographical location. So we're very excited about that. Early returns are really fantastic.

Our wealth business is really getting legs. Again, about 5 years ago, we launched a more aggressive wealth business strategy. We have always had a really good commercial bank, and frankly, if you think about it in Commercial Banking, what you do is you grow up people and help produce a lot of wealth in -- as their businesses grow and become more successful. Well, we had not taken advantage of the wealth part of that business. We would grow the businesses up and take the risk of doing that, and then the wealth tended to go off to someone else.

So we were able to get some really outstanding outside leaders to come in and build that business for us. It's doing extremely well. As you can see, our revenue last year was up 10%, deposits up 14%, loans up 22%. So a huge amount of potential, frankly, throughout the footprint, but also especially in places like Florida and Texas, where we're just kind of really getting started. So the wealth business is offering a lot of potential.

Insurance is a huge opportunity for us. It's a really good balancer in terms of countercyclicality. We're the 7th largest insurance program in the country. We've always been primarily in property and casualty. But for the last 10 years, we wanted to be in the life insurance business, not underwriting, but distribution.

Last year, we were very successful in acquiring the Crump Wholesale Life Insurance business. It increased our revenue from about $1 billion to $1.3 billion. It's a very, very exciting business. So now, we are full arrayed in terms of insurance offerings.

So on the property and casualty side, we have small business, we have medium business, we have very large business through McGriff. We have property and casualty wholesale through our CRC operation, and now we're the #1 wholesaler of life insurance in the country through Crump. So across the spray of insurance offerings, we are in really, really good position in terms of quality and quantity.

One of the interesting things, Keith, about this business, which is pretty exciting to me, is that Crump has this really good capacity in terms of working with institutional clients, in terms of selling their products. So for example, other large banking institutions who would like to sell life insurance to their wealth clients don't have the infrastructure to be able to do that. So they'll come to Crump. Crump works out a service program with them to -- just to train up or support their wealth advisors in terms of distributing the insurance. Or in some cases, will actually put the life insurance salespeople in their shop, alongside their wealth advisors to help them sell life insurance. So a huge opportunity for us. So we're very, very excited about the Insurance operation.

So if you kind of look at where we are with regard to margin, as you know, we have a superior net interest margin. Now our margin has been in the high, in the last 2 or 3 years, because of the accretion from the Colonial portfolio. That portfolio is running off. That's good news and bad news. Good news is loans get paid off when they should. Bad news is some of those high-yielding loans are running off. Our margin is expected to be in the mid 3.70%s in the first quarter. That's just lower rates on the new assets being put on securities and loans, et cetera, and the run-off of the covered portfolio. That's partly offset by lower funding costs and mix changes. We do expect the declines in subsequent quarters to be more moderate as we move through the year, as the more substantial impact of that Colonial run-off begins to subside.

You'll notice that the core margin continues to look stable. And as we look forward, it continues to look stable and it is still a superior core margin. And so, we are a margin-advantaged company and we expect that to remain the case going forward.

Fee income is very strong for us because of some of the businesses I've mentioned. Our fee income ratio is up to 44%, a nice advantage over our peers of 39%. Now remember again, Insurance is seasonal. So it will come down in the first, it will come back strong in the second. But the important thing is that Insurance is really making a sea change now. We're finally -- waiting for about 10 years, we're now in the beginning stages of a hardening of the insurance market. We saw it about 1 year ago, it happened on the wholesale side. Now we're seeing it on the retail side. It's moving through. So we have a hardening of the market, and we're having very effective cross-selling through our banking operation along with Insurance. And so our same-store sales are up 4% or 5%, and I think that will just continue to get better as the market continues to firm up. And so that will be a positive for us in terms of fee income.

Mortgage revenues, on the other hand, will be a bit of a drag as in the first quarter because as I said, the spread -- volumes are pretty good, but margins are tougher on Mortgage. We saw rates tick up, and that put pressure on margins. Now rates have backed down a little and that helps some. But still, for the whole quarter, we think margins in Mortgage will be meaningfully impacted.

Service charges have some seasonality, so when you get through with that, the first quarter is always kind of a seasonally soft quarter for us with regard to fee income. But you can see the long-term trend there is very, very positive. And the business mix that we have is going to make it continue to be very, very positive.

So expenses become very, very important in this kind of relatively slow environment. We have an expense advantage with an efficiency ratio of 55% versus our peers of 63%. So there's some reason that you would expect to see our expenses continue to go down this year, particularly in the credit area. We still have a good bit of credit expenses built into structure. Legal costs and foreclosed property expense, regulatory charges, et cetera, all of that tend -- is tend to coming down pretty directly, as we move on through the period as our NPAs come down. And so, we expect to see some increase in cost for the first quarter because of personnel. That's a seasonal kind of thing.

So when you get through looking at all of that as we head through the year, we would expect expenses to be slightly down as we go through this year. And to be honest, as the market -- or if the market continues to stay soft, we will be even more diligent with regard to expense reduction focus. We have been very careful in terms of our expense management. We are always judicious about it, but we try very hard not to be radical about expense changes.

We think that you can cut your expenses really, really fast, but you can also do a lot of harm to your business if you do it too fast. And so we try to be very careful and moderate in terms of focus on expenses. Nonetheless, if you stay in a relative and slow environment for an extended period of time, that gives you more opportunity to focus on expenses, and we'll certainly do that.

Our capital strength stays very strong. You did see that we revised our Tier 1 common ratio in terms of risk-weighted assets. Recently, I'll point out and emphasize to you, that had nothing to do with GAAP. It was a regulatory change in terms of process in that calculation. Our remaining levels have -- are very, very strong and so it's not a concern. We're all in the middle of the CCAR process. So the CCAR submissions are all in. We're all now waiting to see, so there's not much to say now in terms of CCAR other than in a few days, we'll all kind of know how that will turn out.

I think very importantly, if you look at our pretax pre-credit earnings over a 15-year period of time, it's up a strong 13.3%. I personally think that's the most important, maybe, slide of all, because on any 1 quarter or 2, it's hard to judge the long-term performance of a company. But if you look at BB&T for a long period of time, you will see that we have a very strong earnings engine, driven by the diversified businesses I've described. And I think this shows you that through the various cycles, we've had a continued Northeastern kind of pattern in terms of that growth over time.

The primary reason I believe that we have had that is because we do focus on having the best value preposition in the marketplace. As I said, value is the function of quality relative to price. Now while it's important for me to say that we have better quality, it's more important for you to know that outsiders say that. So for example, if you look at this at the top, this is a survey that was done for us and other companies around the globe by Maritz, which is the best, we think, in the retail business. You can see that we have a distinct advantage over our primary competitors in our marketplace on the overall bank satisfaction, likelihood to recommend and likelihood for future use.

On the bottom left. Importantly, this is Greenwich, which again is the best in measuring client service quality, we think, and commercial small and middle market business. This past year, we received 22 Excellence Awards on a national and regional basis. Over the last 3 years, we've received 83 awards, almost 2x our nearest competitors; so to get, really, a firm evidence from outside that our business strategy is working, as well as our regional strategy.

On the bottom right. I'm very proud of the fact that J.D. Power, for the third year in a row, has ranked us #1 in mortgage servicing. That's never happened before, they tell us, and that's a really good time to have best-in-class in terms of mortgage servicing quality because of all that's been going on in the mortgage business. So we feel really, really good about that.

So we really believe we have the best value in the marketplace and ultimately, throughout good and bad times, values are ultimately what drives client satisfaction, client referrals, client retention and ultimately, profitability. But the most important thing that I would point out to you about BB&T, if you are an investor or considering being an investor, is that we are a culture-driven organization. We're a values-driven organization.

So I tell folks in our company all the time, there are only 3 things that our non-negotiable: it's our vision, our mission and our values. Everything else that we do, everything else I just talked to you about, strategic and tactical, those things change from time to time, based on conditions. What does not change is our relentless focus on our values. And the reason is because ultimately, the values and beliefs drive behaviors. If you ultimately want to try to get the right kind of results, you got have the right kind of behaviors. I think we all kind of intuitively know that. What most people do not realize is that if you're going to have sustained behavioral change in any organization, you have to have the established and deep-seated belief to support those behaviors.

And so our leadership model at BB&T is really about changing beliefs, which we know cause a sustained level of change in behaviors, which get the right kind of results. And so, my primary job, our executive team's primary job, is to consistently and relentlessly preach and teach our beliefs in our organizations, our values.

And we have 10 core values and we frame them in 4 basic areas. So we think the most important values are around character. And that's about honesty and integrity. Judgment is about making really good decisions. So we talk a lot about reality, reasoning, using your independent judgment to make the right kind of decisions. We believe if you have good character and exercise good judgment, you'll have nominal success, meaning you'll be a productive person. You'll be a person that's inclined to work with your team. You'll understand that justice is about those people that produce the most ought to be rewarded the most. And ultimately, what I care the most about, frankly, is for our associates is to ultimately achieve a sense of happiness in life. And while we can't control their whole life, we want people, when they come to BB&T, to enjoy the journey.

It's interesting, you've spent a whole lot of your waking lives at work, and it's really important to enjoy your work, enjoy the journey, because at the end of the day, life is very, very brief. And so we focus on, essentially, self-esteem, a sense of pride in terms of your work. We want people to come to work and know that what we do is worthwhile. It's not just numbers. It's not just making loans and collecting deposits. It's about helping clients achieve their economic success and financial security. It's about helping the communities slip through tough times, just like we've been through. It's about creating good long-term returns for our shareholders. We do that best, though, when we do a really good job for our associates. So we focus primarily on providing a good value proposition for our associates.

For example, while most companies have eliminated lots and lots of benefits for their associates, we still have, today, a fully defined benefits pension program. In addition to that, we have a 6% or 6% 401(k) match. We have all the normal health insurance programs and other well-being types of programs. You may say, well, that's kind of rich. Well, actually, it's really shareholder-friendly because what we know is, that when we have our associates coming to work and they're not worried about their job securities, they're not worried about us jerking their financial legs out from under them, then guess what, they don't worry about their own security, they worry about helping our clients be successful. And when they come in the morning, are focusing on helping our clients be successful, our clients get it. And that's why they buy more services from us, that's why they stay with us longer, that's why they give us referrals. And that's ultimately why we're more profitable, which allows us to generate really good increases in shareholder value and provide really good long-term dividends for our shareholders, which now, as you know, is about 3%, which is a really good dividend for our shareholders.

So we believe we have a very, very good long-standing 140-year history at BB&T. We hope that speaks for something, and we understand you earn your value everyday with your shareholders and with your clients. And so, we're concerned about the challenges that we face today in this environment, but we are very enthusiastic and very positive about coming up with mitigating strategies to take advantage of the unique opportunities that we have, which I've just described to you. And so, we are pretty bullish as we go forward, even in the midst of a relatively challenging environment.

Let me stop there now, and I'll be glad to try to answer any questions anybody may have.

Question-and-Answer Session

Keith Horowitz - Citigroup Inc, Research Division

Okay, first, we're going to get through some ARS questions. The first question up. So BB&T recently announced that there was going to be a tax liability charge in the first quarter. How concerned are you about the future charges and the ability for BB&T to return capital? Response number one is you're very concerned and you see actually that it's going to be a disappointing CCAR result. Two is you're somewhat concerned, maybe CCAR is a slight miss, but it's not a huge issue. Number three, it's not an issue at all in terms of how you think about the stock.

[Voting]

Keith Horowitz - Citigroup Inc, Research Division

Okay. So actually, the 2 and 3 were pretty much in line. 45%, though, somewhat of an issue, 3% says, not an issue, and only 13%, it's always a disappointing issue. I guess to clarify, like you've disclosed this in your 10-Q, 10-K and other potential exposure, you took the charge. But when you actually went through the CCAR process, did you assume that hit, or is there something incremental now for your CCAR process?

Kelly S. King

Well, as you know, what you do in the CCAR process on your submission, you project under the stress scenarios, all of the expectations that you can foresee. And yes, of course, we foresaw that, that was a possibility. This is in old-tax case. It's been around for a long time. Other companies have been involved in it. To be honest, we think we have a very, very good case, and -- but the world has changed and it's interesting how outcomes of these are. But when the recent development with Boney [ph] occurred, we -- it gave us a moment to take a look at it. We felt appropriate to take a look at it. We always try to be very conservative in these types of matters, and so we, I think very conservatively, took an additional charge. And so the way to think about this is, if the worst-case were to happen, we would totally lose, there would be some additional charge. On the other hand, if we totally win, there's a big recapture. And so I think the audience's response is pretty accurate there.

Keith Horowitz - Citigroup Inc, Research Division

Okay, excellent. Okay, the second question. So when you think about valuing BB&T, 4 responses here: Number one, do you view this as an above-average organic growth story, based from what Kelly was saying? Number two, do you look at it as an in-line growth story, but they have the ability to kind of generate better-than-expected growth through well-priced acquisitions, like based on with Colonial and Crump? Three, this is just average growth outlook; they've got limited ability to do deals to improve growth. Four, it's a below-average growth story because they have a big drag from the purchase accounting from Colonial running off?

[Voting]

Keith Horowitz - Citigroup Inc, Research Division

Okay. So the most frequent response, number two, 50% of people thought you were an in-line growth story, where you had the ability to kind of generate above-average growth to be a well-priced acquisition. And actually, number two was the first response. 24% thought you were an above-average growth story.

Kelly S. King

Well, as you just heard, I totally agree to that. I think we have an outstanding growth story. I personally think it's really balanced between acquisitions and organic growth around these unique opportunities we have. Recall that over the last 15 years, we've done a lot of acquisitions and in places like Alabama and Georgia and Florida and now Texas. And so, independent of new acquisitions, we have a wealth of opportunity in terms of just cultivating those opportunities in those newer markets and getting the level of sales in those newer markets up to the level of our core markets, which is pretty dramatic. But I also agree that we are well-positioned for strategic acquisitions. We're very good at acquisitions. Our culture plays well in terms of talking to potential future partners and because that's the way we approach it, as a partnership. We think we are an ideal size. Frankly now, we are large enough to do some meaningful-sized acquisitions. We don't think we're too large in terms with this business of, are the regulators going to allow companies to grow going forward? That's certainly a legitimate question when companies are $500-plus billion in today's world, whether or not they're going to be allowed to grow. I don't think any of us really know the answer to that. I doubt the regulators know exactly the answer to that. But for a company, just $184 billion in size and there's certainly some good companies that are almost 2x our size, that I think would be viewed very well by the regulators. I wouldn't think that the regulators would particularly care about BB&T getting larger at a reasonable level. So I think we have really good opportunities on both sides, organic and acquisition.

Keith Horowitz - Citigroup Inc, Research Division

So Kelly, when the quarterly results come out everyone focuses on loan growth and absolute loan growth as a measuring stick. Can you talk about -- there's lots of opportunities, if you want to, to kind of goose up your loan growth and some of the deals that are out there. Can you describe like some of the deals that banks are seeing right now? And I guess, based on your guidance, you're pretty much shying away from those types of deals and kind of sticking to your netting.

Kelly S. King

Yes, so loan growth is very, very interesting now and that we could, frankly, be growing our loans a lot faster than we are today. There are 2 primary reasons that you might see some difference between us and some of our peers, and I'm not being critical of them, I'm just trying to explain the difference. So we are very conservative in terms of lending. We -- again, remember everything we do is premised around trying to produce long-term steady shareholder growth and value. If you're looking for the latest flash in the pan, don't invest in BB&T. That's not the way we're trying to lead the company. If you're interested in good long-term returns and a company that has paid a cash dividend since 1903 and has had top quartile-type performance over a long period of time and in terms of shareholder return, BB&T's the kind of investment you want to have. So to get that, you've got to be relatively conservative in underwriting. You can be aggressive in terms of distributing, but aggressive -- conservative in terms of underwriting. So for example, today, somewhat to my surprise, some companies are taking really big hold positions. So for example, if a company is borrowing $1 billion and they go to 10 companies, 10 banks, we might take a $50 million or maybe a $75 million hold position in that. Some others will take $150 million or $200 million. We can do that and grows loans 2x as fast on that transaction. We just think granularity is very important in loan portfolios because a $200 million loan looks pretty good going on; it doesn't look so good going off. The other thing is that leverage lending is a really big part of what's going on in the marketplace today. And that's good for equity investors if they can lever it up and knock a home run. But for those leverage providers, it's relatively risky. So we don't do leverage lending, and so there are just a lot of those deals that are being done out there today that we're just not participating in. We think it's not -- it doesn't meet our risk appetite, and we're just not going to do it. We're not changing our underlying discipline in terms of underwriting at all. We are focused on providing the best value. We're focused on providing the best overall relationship. We're very aggressive about calling and meeting our clients. We're very aggressive about being the most responsive in the marketplace, but we're not going to be the cheapest and we're not going to take too much risk. We're going to earn it the hard way in terms of getting good relationships by value providers.

Keith Horowitz - Citigroup Inc, Research Division

You said that you're expecting positive operating leverage this year and you're saying, right now, you're thinking that expenses might be slightly down, and you said that if things are slow, you'll look to kind of cut back expenses even more. What are some of those opportunities? If things do come out, like they're slow, what are some of the things that you can really do to your expenses without really kind of cutting to the bone?

Kelly S. King

Yes. So Keith's exactly right. So we had positive operating leverage last year. We think we'll have positive operating leverage this year. Revenue will be the relatively light because of what we talked about. We will expect to see expense decline. Part of that will be credit cost and some of the other things I've talked about. But we have some opportunities. Frankly, we have some expenses that are built on capacity expectations that if the capacity production's not there, then you simply have excess capacity. We have some really unique opportunities in terms of a number of our businesses. Take Insurance, for example. Wade Reeves [ph], who leads that operation for us, is in a process of kind of rationalizing the distribution expenses. So we've gone out and grown our Insurance business. It's been largely through acquisitions. And so what we do basically there is we leave the front room -- actually the name, we'll kind of co-brand. Say it's Jones Insurance Agency, we'll make it Jones BB&T Insurance Agency. So we'll leave the front room kind of alone, so the clients won't notice any change, but we'll pull all the backroom into our larger-scale backroom, and we get efficiency that way. We pull a lot of little small ticket insurance sales out there into a backroom central call center for sales, which lowers expenses pretty substantially. Something like wealth, for example, which is ramping up right now. Everyday, it is getting more scaled up in terms of expenses. Our branch distribution system, like everybody, we're finding ways to get more efficient in that, as we see more and more volume shifting to electronic means of interaction with our clients. So there are a number of ways without changing the fundamentals of things like pension and things like that, to actually just focus on headcount. What we actually did, starting about 9 months ago, was we challenged our leaders to tackle this a little -- well, substantially differently than most companies. And what most companies tend to do is there's top down, they go out and say cut X, cut Y, slash here and slash there. What we did was we challenged our folks 9 months ago, we kind of saw this slow economy coming. It wasn't hard, all you had to do was look at what's going on in Washington, and you'd kind of know this was coming. And so we challenged our leaders to say, you've got to figure out how to reconceptualize your business in a slower environment. We don't know if it will last 1 year or 2 years, or a Japanese-style 10-year. We just don't know. But what we do know is that we need to be prepared, and so we challenged them to reconceptualize their business from the bottom up. And we've been going through a process now for about 9 months, and where they have made presentations to the executive management about how they can see that they can reconceptualize their business, invest in more revenue with a same fixed cost or reduce cost without impacting revenue. And I tell you what's kind of interesting is when you trust your people and when you give them the opportunity to run their own businesses, it's pretty amazing what they'll do. If you go in and just tell people what to do, you destroy their sense of pride, their sense of self-esteem, their sense of ingenuity in terms of trying to run their business. If you go in and say we got to be challenged here, I need X more dollars of profit out of your business, figure it out. I think you're smart enough to do that. People get inspired with that. They get excited, then they really -- they come up with some amazing sets of solutions. So we're very pleased with how that's going, and that will continue as we go through this year. And I'm quite confident that we'll get the expense reductions we need, along with even challenged revenue to create a positive operating leverage.

Keith Horowitz - Citigroup Inc, Research Division

Yes.

Unknown Analyst

Can you provide any additional color on the change in risk-weighted assets and...

Kelly S. King

I couldn't quite hear that.

Unknown Analyst

Could you provide any additional color or commentary around the change in risk-weighted assets and in particular, it seemed that Moody's took a pretty negative view on that, specifically around the control environment? And I just was wondering if you had any more commentary.

Keith Horowitz - Citigroup Inc, Research Division

She's asking about the RWA change and that Moody's have a negative view on that?

Kelly S. King

Okay, the RWA change, sure. Sure, thanks. Yes, so it was a process change that changed a -- just a technical process change. It's a relatively small change in terms of risk-weighted assets, in terms of regulatory capital. It does not affect GAAP. I think it changed our risk-weighted assets about 3% or 4%, so it's relatively small, and it's just a process change.

Unknown Analyst

But is there any additional control issues? It seemed from Moody's review that they were rated more broadly about internal controls around that?

Kelly S. King

I think your question was, do I expect any additional control issues related to that? No, I do not, no.

Unknown Analyst

Just following up on that. So have you had any conversations with Moody's? And did you think that their action was a bit aggressive in putting you on outlook negative?

Kelly S. King

Yes. Well, personally, I think they were a little aggressive. They're a good company. They do a good job and they're under a lot of pressure to try to do the right thing. But in my view, it was a relatively strong reaction to a relatively minor change. But for a company that's as well-capitalized as we are, I thought it was a bit strong. But that's fine. They'll change it in a while, I believe, because we'll show it's nothing else hiding out there and it'll go away, in my view.

Keith Horowitz - Citigroup Inc, Research Division

One question we get a lot from investors with someone the size of BB&T, would the regulators allow you, if you came to them with a potential deal for a bank, say a $50 billion asset, could a deal like that get done today? Do you think deals like that can -- are going to just take time?

Kelly S. King

Yes, that's a question that gets a lot of conversation between CEOs and others. I personally think so. I don't think -- I think some people are reading the regulators wrong about this. I don't think the regulators are trying to avoid consolidation. I think they see the merits of consolidation. I think they generally don't want to see a lot of multi-trillion dollar companies, that they're really very concerned about the aggregate too-big-to-fail issue and ultimate consolidation at the top of the house. But they seek a very high performance of the group of banks that are in that $150 billion to $400-or-so billion level, that are really super. Look at the ones that are up there, P&C, U.S. Bank, BB&T, really high-performing companies, and so they understand that. So I'm not saying that the scrutiny wouldn't be pretty challenging and that you wouldn't have to do extraordinarily detailed projections and analysis. But look, the truth is if BB&T did a combination with a $50 billion company that was a really good company, we wouldn't do it if it was not a good company. We wouldn't do it if it wasn't a good combination. So what would happen would be, we would end up with a better asset, liability, mix. We would end up with, more likely, with a better margin. We'd end up with better people because we'd take the best people from both sides. We'd end up with better technologies because you take the best technology of both sides, the best product of both sides. So the fact is a combination like that makes a better company. Why would the regulators not approve that? I find myself to be, frankly -- and I'm actually been involved through the Federal Reserve Bank in Richmond and I'm now on the Federal Advisory Council in Washington, and so I've spent some time with them. I find them to be pretty smart when you get right down and talk to them one-on-one, and they kind of understand this stuff. So I think if we had the right kind of opportunity, I personally think it would be approved.

Keith Horowitz - Citigroup Inc, Research Division

So then, why haven't we seen more M&A?

Kelly S. King

Well, why we haven't seen more is because everybody's hunkered down right now, trying to get through this -- their crisis, and now there's apprehension about where we're going. And I really think most CEOs are kind of saying, we can't really make strategic big decisions right today until we get a little more clarity, vision in terms of where we're going. I don't think it's because CEOs are not looking at it from the wisdom of long-term combinations. Most CEOs I talk to recognize that over time, scale is a really important issue and combinations of really good companies, well done with really good leadership, makes sense. And so I personally think you will see combinations as we go forward. Now look, over the years, Keith, as you know, I've been outspoken and tried to be honest about this. I don't want to set off a bunch of rumors that BB&T is getting ready to go do a bunch of big mergers. I do not expect big merges to occur anytime soon because of what I just described. We'll be opportunistic and we'll look at opportunities when they come along. But we're focused on organic growth, and if the right kind of acquisitions come along, we'll be very excited about that, too. Yes?

Keith Horowitz - Citigroup Inc, Research Division

We have time for one last question.

Unknown Analyst

Kelly, you were pretty bearish on interest rates, bond market, at the end of last year. It proved right for a little while, we backed up in yields back down to 1.85. Can you update your personal forecast on interest rates for us?

Kelly S. King

Well, it is my personal forecast -- and I'll say that even though I just mentioned I'm on the Federal Advisory Council, I don't have anything to do with setting interest rates. Please, be sure -- clear about that. So I think the Fed has made it very clear that they're to keep short rates low, extending service through '14. Now they've revised it around unemployment and inflation, but I kind of see that. But I believe we are clearly building in all of the elements for a meaningful rise in rates, much sooner than most people think. Either we're going to get a rapid, more rapid growth, as we expect, which is going to generate a need for rising rates and/or you're going to settle into just pure stagflation. And in any event, you'll see the long end move first. Because they're going to keep the short end really low, they're going to really keep a lot of pressure on the 10-year. So the long end will move first, and then the 10-year will pull up, and then it will all ultimately pull in. So you'll get a real steepness early, in my view, and then you'll see they'll loosen up on the low end and it will kind of move up. And that will be very good news because that will be a result of an improving economy and that will be very good news for bank profitability and hopefully for bank stocks.

Keith Horowitz - Citigroup Inc, Research Division

Okay, we're out of time. But thank you very much.

Kelly S. King

Thank you, all, very much.

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