On Tuesday, while speaking at Barclays Global Financial Services Conference, BB&T Corp.’s (NYSE:BBT) chief executive officer (CEO) Mr. Kelly King stated that the company will reclassify more than $1 billion non-performing assets (NPAs) into loans held-for-sale in the third quarter 2010. Moreover, the company will try to sell these assets to investors over the next 2-3 quarters.
Earlier this year, BB&T had tried to sell problem loans in large blocks but did not receive expected bid values. Currently, the company has decided to sell these loans in small portions to a wider pool of investors.
Until second quarter 2010, BB&T refrained from large bad loan sales and write-downs, which many other U.S. banks such as Citigroup Inc. (NYSE:C) had done profitably since the beginning of financial crisis in 2007-2008. However, Regions Financial Corp. (NYSE:RF), Fifth Third Bancorp (NASDAQ:FITB) and Synovus Financial Corp. (NYSE:SNV) suffered huge losses while disposing of their NPAs in late 2008, given that they had to sell at a much lesser value.
In the second quarter 2010, BB&T changed its strategy and sold $682 million of NPAs significantly higher than $140 million in the first quarter and $102 in the prior-year quarter.
Most of the BB&T’s loans were concentrated in Virginia and North Carolina where the borrowers were less affected by the loan foreclosures than in Georgia and Florida. Hence, the company had so far abstained from selling NPAs.
Also, BB&T was one of the few U.S. banks that had reported profit throughout the financial crisis. Thus the company was not actually having any problem with its NPAs. But in the present scenario, with many companies selling or having already sold their bad loans, BB&T is also joining the group to do away with these loans. This will also protect the company from future losses.
Apart from BB&T, PNC Financial Services Group Inc. (NYSE:PNC) also faced a similar problem with its assets. PNC Financial Services is also now trying to sell off its NPAs.
Mr. King also commented that the third quarter write-downs will be absorbed by BB&T’s earnings and will not affect the dividend. The company pays a dividend of 15 cents per share, which is one of the highest in the financial sector.
The announcement has raised concerns regarding the amount of bad loans in the company’s balance sheet. However, we believe BB&T will continue to benefit from growth opportunities and increased client activity once the market recovery adopts a steady pace.
BB&T currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Also, we maintain a long-term Underperform recommendation on the stock.