We lowered our recommendation on
BB&T Corporation
(
BBT
) to Neutral from Outperform despite the fact that it reported
better-than-expected first quarter results. The recommendation was
downgraded owing to the company's ever-increasing operating
expenses.
BB&T continues to grow in both organic and inorganic front.
Overall, the company's strong liquidity position and steady
improvement in capital and profitability ratios are the major
positives. Nevertheless, the current protracted economic recovery
and various regulatory issues will make it difficult for the
company to significantly improve its top line.
One of the primary strengths for BB&T is the continued
stability in its net interest margin (NIM). Over the last three
years, NIM has been improving as a result of lower deposit and
borrowing costs. Additionally, though there could be NIM pressure
with the shrinkage of the Colonial-related accretion and low
interest rate environment, we expect lower deposit costs and strong
loan growth to keep the overall upward momentum intact.
BB&T can be viewed as an asset for yield-seeking investors. The
company pays regular dividend as a part of its capital deployment
activity. In March, following the release of the Federal Reserve's
stress test results, the company received the approval to hike its
quarterly dividend by 25% to 20 cents per share. Over the longer
term, the company is targeting a dividend payout ratio in the range
of 30-50%.
Further, BB&T continuous to acquire small firms to augment its
revenue streams. Last year, the company announced four acquisitions
that will enable it to expand its market share in the insurance
sector. Going forward, the company intends to pursue more
acquisitions that will enhance its banking network, improve top
line and client delivery system.
On the flip side is the company's significant exposure to
residential mortgage loans, direct retail residential loans, sales
finance and revolving credit loans. Although BB&T has been
successful in implementing assets disposition strategy, it still
has a large amount of risky loans that could pose a problem if
economic conditions continue to deteriorate.
Further, BB&T is severely exposed to risks and uncertainties
associated with the integration of its acquisitions. Given the
continued market volatility and economic uncertainty, the company
may need to take additional markdowns and provide for allowances
for loan losses on the assets and loans acquired from the
acquisitions that the company has been making.
Moreover, like many other peers including
PNC Financial Services Group Inc.
(
PNC
) and
SunTrust Banks Inc.
(
STI
), BB&T's profitability will likely be affected by various
financial reform laws due to increased costs and fee restrictions.
New capital proposals unveiled by the Fed suggest that big U.S.
banks would be required to maintain a total tier 1 ratio of 7% to
risk-weighted assets.
All these factors are expected to lower the company's
flexibility with respect to its business investments to some extent
in the medium term. Currently, BB&T retains a Zacks #3 Rank,
which translates into a short-term Hold rating.
BB&T CORP (BBT): Free Stock Analysis Report
PNC FINL SVC CP (PNC): Free Stock Analysis
Report
SUNTRUST BKS (STI): Free Stock Analysis Report
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