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Morningstar | BB&T Cruises Through 2Q, With Exceptional Growth in Insurance Fees; Rate Cuts on the Horizon

Narrow-moat BB&T turned in excellent second-quarter results, with adjusted return on average assets of 1.59% and adjusted return on average tangible equity of 20%. Adjusted EPS was $1.12 for the quarter, up 11%, while tax-equivalent revenue was up 6%. The bank’s overall expenses were affected in the quarter by extra items related to the pending merger with SunTrust, but adjusted expenses were up 1.4% year over year. Management gave a brief update on the merger process, reaffirming their confidence in the projected expense savings as well as the potential for revenue synergies, although these have not been explicitly incorporated into any numbers management has made public. They still expect the merger to close in the third or fourth quarter of 2019. We are now incorporating three rate cuts through 2020 into our projections, and after making these and other adjustments, we have decreased our fair value estimate to $52 per share from $53.

One of the most impressive items to us in the quarter was the progress BB&T is making with its insurance unit after acquiring Regions Insurance. BB&T continues to outgrow the market, exhibit high retention rates, and get new business. This is occurring while pricing in certain markets is firming up. The margin expansion of over 500 basis points and organic growth of over 11% in the quarter was very strong. Strong fee growth from insurance, along with strength within I-banking and a pickup in mortgage fees is driving nice fee growth for 2019. For net interest income, NIMs were down, which we would expect to continue for the rest of the year. However, based on our projections and updated guidance, we still think the bank can reach net interest income growth for full-year results, even with two rate cuts.

Expenses were up only low single digits, largely influenced by higher fee-income-related compensation. All things considered, expense control continues to be good. Loan growth was decent, with average loans up 4.4% year over year. Within this, commercial and industrial growth was strong, as was growth for mortgages and indirect consumer lending. Average deposits were roughly flat. Credit quality remained pristine all around for the bank, with key measures of asset quality and credit costs remaining range-bound.