by Robert Gordon
BB&T (BBT) is one of the country's largest regional banks, with about $175 billion in assets. Its long term CEO, John Allison, ushered in a period of large asset growth during his tenure, and also infused the bank with a heavy dose of tea party aligned political thinking. His most famous claim is that, in last decade's financial crisis, BB&T was forced by the Federal Reserve and Treasury to accept $3.1 billion in TARP money, not because it was needed or wanted, but rather to help obscure TARP's real objective of saving the nation's largest banks, such as Citigroup (C). During his 21 years as CEO of BB&T, Mr. Allison oversaw some 60 bank acquisitions, as the bank grew from under $5 billion in assets to over $150 billion by 2009.
Allison's successor, and current CEO Kelly King, while not quite the media hound Allison was, has made his position clear as well. At the company's annual meeting in late April, King gave his belief that in ten years, there will only be six substantially sized banks in the country, including, of course, BB&T. The others, JPMorgan (JPM), Bank of America (BAC), US Bank (USB), PNC Financial (PNC) and Wells Fargo (WFC). Whether intentional or not, missing from King's list were banks such as Citigroup, Fifth Third (FITB), and SunTrust (STI), all either larger or more profitable than is BB&T right now.
In the first quarter of this year, BB&T followed the formula that all successful retail bank are following, more or less. Lower credit costs, somewhat higher loan portfolio, lots of mortgage fee income, and controlled expenses. BB&T's first quarter credit costs fell by $85 million from the year ago quarter, and interest income, on the back of a 4%, or $5 billion increase in the loan portfolio, and a $11.5 billion increase in securities held, increased by $67 million. Combined with a drop of $62 million in the credit reserve provision, net interest income rose by over $200 million. Non-interest income was up $155 million, as the low interest rate environment led to a slew of mortgage refinancings. Mortgage fee income more than doubled from the first quarter of 2011, rising by $121 million. And on the expense side, led by large drops in regulatory charges and foreclosure expenses, the total expense of BB&T rose by less than one percent. The result of all this was income of $431 million, or $0.61 per share, up 91% from the year earlier. The bank's return on assets was a solid 1.03%, and the historically low efficiency ratio was a sterling 52%.
The big news for the company so far this year was its second quarter purchase of Crump Group, one of the nation's largest wholesale insurance brokers. This $570 million dollar purchase will provide a substantial shot in the arm to BB&T's already large retail insurance brokerage business. In the first quarter of 2012, BB&T's insurance brokerage contributed $271 million in revenue, and the Crump addition is forecast to contribute another $75 million or so each quarter.
My problem with BB&T is the bank often let its political beliefs get in the way of its business operations. After in 2005 the Supreme Court allowed for private developers to have eminent domain rights, the bank would not give loans to any developer who used private eminent domain to acquire property. The bank also spends several million dollars per year on educational seminars in order to spread BB&T's version of Ann Rynd's antigovernment, pro capitalist view.
At the mid June Morgan Stanley Financials Conference, Mr. King made much of BB&T's strength and stability. In the first quarter, 2012 Federal Reserve stress test, BB&T had the strongest capital level among all true regional banks.
Were it not for its politics, I might have been a BB&T shareholder already. It is just the sort of large, conservative, profitable and efficient bank I tend to like. It pays a dividend yield of 2.6%, was not downgraded in the recent Moody's (MCO) bloodbath, and has a five year PEG of 0.9. It has not fallen though as much as other banks have during this second quarter of the year, so it is not what I would call undervalued. If you are interested in a large, conservative, well run Southern regional, BB&T may be your golden ticket.
SunTrust received an upgrade today from Morgan Stanley (MS), to "overweight." SunTrust has been a little behind the curve in recovering from the recession, and was slow to commit to embracing the increase in mortgage refinancing under HARP. But, with dominant market shares in Florida and Georgia, SunTrust is well suited to gaining mortgage production fee revenue, as well as enjoy its rich, low cost deposit base and lowered funding costs. The rationale is that now is a better time to buy, than after these revenue gains and cost reductions are in place. Morgan Stanley raised its target price to $29 per share, an 18% premium to today's price.
Both BB&T and SunTrust have appeal, to be sure. But the 800 pound gorilla of regional banking is U.S. Bank . At about twice the size of the two southern banks, Minneapolis based U.S. Bank also presented at the Morgan Stanley conference, justifiably boasting of its peer leading 1.60% return on assets and 16.2% return on equity, and 51.9% efficiency ratio. That combination sets it apart from any other large bank out there. Its double digit deposit growth gives it plenty of inexpensive funding to support continued loan growth, and its commitment to return 60% - 80% of its profits to shareholders through dividend growth and share repurchases leads me to the conclusion that this is America's premier large bank. But it is difficult to see any further improvements in the bank's efficiency or productivity. In short, the "easy" earnings gains are behind U.S. Bank. Any further growth will have to come from further growth in the balance sheet and loan portfolios. This is a great stock for conservative or income seeking investors. To those of us looking for capital growth, there are better options.