BB&T: Loan Growth and Cheap Funding Costs Offer Dividend Upside

| About: BB&T Corporation (BBT)

Bank earnings season is approaching quickly, and media chatter is likely to increase volatility across the basket. With big swings ahead, investors may get attractive entries on banks such as BB&T Corp. (NYSE:BBT), which is expected to report on July 22nd.

BB&T has one of the highest dividend yields and payout ratios of all big banks, at 2.4% and 30-50% of earnings, respectively. The bank is experiencing loan growth and has substantial cross-sell opportunities in consumer, commercial, insurance and wealth advisory. Its $0.16 dividend last quarter was 7% higher than Q4, and dividends have a nice chance of increasing further given Street earnings estimates and strong capital ratios.

This year, earnings per share ("EPS") are expected to increase 46% to $1.72. In 2012, EPS is anticipated climbing another 44% to $2.47. The company's tangible common equity was 7.2% in Q1, up from 6.4% year-over-year and its Tier one capital of 12.1% positions it nicely for Basel III.

BBT has $157 billion in assets and operates nearly 1800 branches in 12 states, primarily east of the Mississippi, with significant exposure in Virginia and North Carolina. The bank took advantage of the FDIC's recessionary fire sale to increase its footprint too, acquiring the 346 branch Cololonial BancGroup in 2009.

In Q1, BB&T reported growth in commercial and industrial loans of 8.7% annualized quarter over quarter, which is 6.1% higher year-over-year. Average mortgage loans increased 22.7% while average auto loans were up 3.8%. Revolving credit increased 4.6% from Q1 2010. Residential mortgage loans were up 16%, thanks to a decision to hold more 15 year and ARM's for investment. Overall, BB&T is targeting 3-5% average loan growth this year, which supports solid earnings growth next year.

The company's net interest margin ("NIM") remains strong too. The company is targeting NIM of 4% this year. Q1 NIM of 4.01% was up 13 basis points year-over-year. Banks continue to benefit from a shift in deposit base from CD's to non-interest bearing deposits. At BB&T, such deposits increased by 13.7% in the past year, driving deposit funding costs down to 0.82% from 0.90%.

The quality of its loan portfolio has improved over the past year, with past due loans the lowest in three years last quarter. Its net charge-offs dropped to 1.65% from 2.15% in Q4. And, non-performing assets have fallen for four consecutive quarters to 2.56% from 2.82%. ROE in the quarter was 5.48%, up from 0.89% in Q1, 2010. Improving metrics allowed the company to reduce loss provisions by $235 million.

The company has upside opportunity in specialized lending, where revenue increased 18.1% in 2010 from 2009, and insurance, which accounted for 11% of its revenue last year. The company also boosted its wealth advisor headcount 10% in Q1, which will help drive revenue as they leverage products across its branches.

With BB&T trading more than 12% below its 52 week high and more than 25% below its 2010 peak, investors are too complacent. Another earnings report showing loan growth and improving ratios offers upside, making this a good time to buy on down days.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBT over the next 72 hours.