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Morningstar | Slowing Underlying Fee Growth for BB&T; Future Gains From SunTrust Merger Remain Key

Narrow-moat BB&T turned in an OK first quarter. Adjusted return on average assets was 1.55%, while adjusted return on average tangible equity was 19.86%, both roughly in the range we have seen recently for the bank. Adjusted earnings per share were $1.05 for the quarter, up 8.2%, while preprovision net revenue was up 3%. The bank’s overall expenses were affected in the quarter by extra items related to the pending merger with SunTrust; however, BB&T did also call out extra marketing expenses as competition is heating up in select markets. The longer the credit cycle stays calm, the more we expect banks to increase competition. BB&T gave a brief update on the merger process, emphasizing that it is still confident in the projected expense savings, and it appears the shareholder vote will happen early in the third quarter. Management stuck to its previous guidance, and after making some adjustments to our model, we have increased our fair value estimate to $53 per share from $52.

Loan growth was decent, with average loans up 3.6% year over year. Within this, commercial and industrial growth was strong and retail-related items were also strong in general, while the bank is remaining cautious in the commercial real state space. BB&T is not the only bank we have heard calling out the CRE space as an area warranting caution. The bank saw a significant shift toward interest-bearing deposits, which we would expect to moderate a bit in a more flat rate environment. Despite this, net interest margins still managed to increase, although we would expect further expansion to be minimal. This led to an increase in net interest income of 4%.

Fee income growth was less than stellar, up 2%. This was largely attributable to the Regions Insurance acquisition; noninterest income was actually down after backing that out. Interestingly, BB&T is seeing some of the opposite trends that peers are seeing, as service charges were up year over year while mortgage banking fees continued their steep decline. Trust and investment advisory revenue was also soft, as were investment banking and brokerage fees. Even so, expense control was solid, and expenses would have been roughly flat after backing out the increase due to the insurance acquisition.

Credit quality remained pristine all around for the bank, with key measures of asset quality and credit costs remaining range-bound. The nonperforming asset ratio remained at its lowest relative level since before the crisis, delinquencies decreased, and net charge-offs were roughly equal with where they were in the first quarter of 2018.

For our recent analysis of bank M&A opportunities, please see our March Select presentation, "The Fellowship of the Banks: U.S. Banks Merging for Size, Scale, and Scope."