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Morningstar | Slower Growth for BB&T, but Efficiency and ROEs Headed in the Right Direction

Narrow-moat-rated BB&T turned in a decent second quarter, with an adjusted return on average assets of 1.49% and adjusted return on average tangible equity of 19.78%, both very close with last quarter’s results. Loan growth was present, but not amazing, at 3.5% annualized quarter over quarter. As expected, net interest margin expansion was limited, only 1 basis point quarter over quarter. We expect NIM expansion to be fairly limited for BB&T for the rest of the year, and given slower earning asset growth, we wouldn’t expect amazing earnings growth here. Instead, moderate noninterest income growth and solid expense control should lead to decent operating leverage and earnings per share growth this year. Previously, based on unadjusted results, BB&T was posting returns on equity below 9%. Now that certain acquisition integrations have been completed and other expense control measures integrated, the bank is slowly moving back to form, which we largely expected. Management announced that they will likely institute a new expense control program in 2019 and hope to hold expenses flat once again for a whole year. This, combined with the bank’s investments in back-end infrastructure, getting loan approval times down from over a day to minutes on select loans, and moderate gains elsewhere should allow the bank to continue to improve its operating efficiency and profitability over the medium term.

We like where the bank is headed, and after making minor adjustments throughout our model, we are raising our fair value estimate to $52 per share from $51. This is 2.5 times tangible book value as of June 2018.

Credit quality remained pristine all around for the bank, with key measures of asset quality and credit costs remaining range-bound, and many even improving slightly. We would not be surprised, given the strong employment market, if this trend of excellent credit quality continues for the rest of the year. Deposit betas increased somewhat during the quarter, a trend that we have long expected, and BB&T remains one of the less asset-sensitive banks we cover. Noninterest income growth was not too strong, but the bank should get a boost in the latter half of the year from its acquisition of Regions Insurance Group, as BB&T remains one of the dominant insurance brokers in the world.

BB&T recently approved share repurchases of up to $1.7 billion over the next four quarters and increased its dividend another 8% after the latest round of stress tests. Given BB&T's asset size, the bank should be receiving regulatory relief over the medium and will be able to maintain its higher-than-average dividend yield. However, management said on this quarter's earnings call that they likely won't use the full $1.7 billion for repurchases this year, and don't want their common equity Tier 1 ratio drifting below 10%, in preparation to make the jump over $250 billion in assets. This should limit ROE expansion via capital reduction for the bank, and we had already highlighted BB&T as likely to be below average in its ability to expand returns this way.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress-test regulations, please see our July 8 special report "New Regulatory Proposals Will Change Stress-Test Landscape."