4 Issues With the Best Bank in Town

When you call yourself the "Best Bank in Town," you'd better live up to the name. Until its most recent earnings report, BB&T's (TFC -0.13%) position as a top financial institution was hard to deny. The company consistently has carried a low level of non-performing loans, and organic loan and deposit growth has been good as well. However, in the last few months, something changed.

Source: BB&T.

Set aside all the rest, organic growth is the best
Banking has been made out to be this complicated business that only a small group can really understand. While it's true that some banks make complicated financial wagers, the banking business still is about deposits, loans, and credit quality.

One of the biggest worries facing BB&T today is the company's ability to attract deposits seems to have hit a wall. In the current quarter, BB&T said its average deposits increased by just 3.7%. Considering its competition's performance, this growth rate isn't going to cut it. JPMorgan Chase and Wells Fargo (WFC -0.56%) both reported better than 6% total deposit growth. Even BB&T's more localized competitor, PNC Financial Services (PNC 0.29%), reported total deposits increased by 4%.

It seems clear based on these results that BB&T is losing deposits to the competition. If that is the case, the bank will face several challenges until this issue is resolved.

Grow deposits or borrow money
If this trend of slower deposit growth continues, the second issue facing the bank is its cost of funding could rise. Deposits represent one of the cheapest sources of funding, and without sufficient deposit growth, the bank would have to rely on more expensive solutions, like issuing debt. Look at the divergence between BB&T's deposit growth and loan growth over the last several periods.

Source: SEC filings.

In 2010 and 2011, the bank grew deposits much faster than loans. However, about halfway through 2012, this trend reversed. The bank's previously strong deposit growth allowed the company to cut its long-term debt. However, slowing deposit growth no doubt contributed to BB&T increasing its long-term debt by just over $1 billion (a near 6% increase) in the last three months. When a bank is growing loans and doesn't have the same level of deposit growth to cover these commitments, debt becomes the solution.

Where did the money go?
If BB&T is showing slower deposit growth, where did all the money go? The bank isn't having problems attracting noninterest bearing deposits, as over the last several years, the bank has grown this category by more than 20% per annum. Most investors know banks are more than willing to let CDs run off as these funds are higher cost.

This leads us to the third issue facing BB&T. The bank is having problems retaining Public Funds. Public Funds are deposits made by civic organizations, local governments, and the like. In the second quarter of 2013, BB&T reported a decline of 3.2% year over year in interest-bearing accounts. This represented a nearly $1 billion decline versus last year.

By comparison, BB&T had been growing these deposits by at least 7.5% over the last three years. The bank's peers are growing interest bearing deposits significantly as well. JPMorgan Chase reported a 9% increase versus last year, PNC saw a nearly 17% increase, and Wells Fargo's interest checking accounts jumped by more than 30%.

While interest checking accounts are slightly more expensive than noninterest bearing accounts, BB&T's average yield on this type of account is just 0.08%. Given that BB&T was growing these accounts for the last several years, and that its peers are all still growing, this should be a concern for investors.

What's the bottom line?
The fourth challenge facing BB&T is the affect on the bottom line that slower deposit growth seems to have on the bank. Take a look at the difference between BB&T's return on equity compared to its peers.

Source: SEC filings.

It seems pretty clear that banks with better deposit growth also report a better return on equity. With a lower return of equity than several of its peers, investors need to think twice about why they own BB&T stock. BB&T has been using the tag line "Best Bank in Town" to help clients remember the BB&T name. If the bank can't fix its deposit growth rate, this might be the best bank in town no more.