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BB&T's Southern Charm (and Prudent Risk Management) Wins Over Regulators

If you're an investor in BB&T (NYSE: BBT  ) , then the Federal Reserve's most recent round of stress tests is arguably a cause for celebration. Released yesterday, the popular regional lender emerged from the central bank's gauntlet in some of the best shape of its peers. The charts and discussion below examine how the company's capital and earnings held up under the Fed's "severely adverse" economic scenario.

The purpose of the stress tests is to gauge how the capital bases of the nation's largest financial institutions hold up in the face of economic and financial turmoil. Among other things, the most extreme case assumes that real GDP declines an average of 4% this year, unemployment ratchets up to 12.1% by the second quarter of next year, and that home prices plummet by 20% over the next 24 months.

As you can see in the chart below, BB&T's Tier 1 common capital ratio hardly budged despite these assumptions. Starting from 9.5% at the end of last September, it bottomed out at 9.4% over the hypothetical time period extending from the fourth quarter of last year through the end of 2014. This hardly perceptible decline not only far exceeds the Fed's 5% reference rate, but it also makes BB&T one of the best performing banks in this regard, behind only the Bank of New York Mellon. By comparison, the average Tier 1 common capital ratio of the 18 institutions tested fell by a third, down to 7.4%.

Source: Federal Reserve.

With respect to net income, BB&T fared equally as well. Its hypothetical pre-tax earnings for the nine-quarter time period came in at $600 million. This greatly exceeded the 18-institution average loss of $10.8 billion. As above, the Bank of New York Mellon fared the best, with $5.5 billion in earnings despite the assumed economic Armageddon.

Source: Federal Reserve.

Breaking this down a bit further, as you can see in the figure above, BB&T's $7.1 billion in pre-provision net revenue was largely consumed by loan loss provisions -- that is, money set aside to cover future losses from soured loans. These accounted for $6.4 billion in losses, while estimated losses from other sources ate up an additional $100 million.

And digging into the loan losses specifically, BT&T's were almost equally distributed between commercial and consumer customers. The former accounted for an estimated 53% of the loan losses, while the latter made up the remaining 47%.

Source: Federal Reserve.

At the end of the day, the stress tests are meant to do exactly what the name implies: stress you out. For investors in BT&T, however, there's literally no reason to feel this way, as the bank has proven again that it's one of the best-run regional lenders in the country.

Want to learn more about BB&T?
With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or if finance stocks are a screaming buy today. The answer depends on the company, so to help you figure out whether BB&T should be on your radar, I invite you to read our premium research report on the company today. We'll fill you in on both reasons to buy and reasons to sell BB&T, and what areas BB&T investors need to watch going forward. Click here now for instant access!

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9/26/2016 3:15 PM
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