Income Investor recommendation BB&T
For Q1, GAAP net income was down 2.3% versus last year. Operating earnings, which excludes merger and restructuring expenses, were up 3.4%. As with peers like PNC Financial
Net interest margin fell to 3.61% from 3.82% last year, partly due to a mix shift in low-cost deposits to higher-cost money markets and CDs, because of rising interest rates and the competitive environment for deposits. To combat this, BB&T is rationalizing its deposit pricing strategy and being less aggressive on CD pricing.
In terms of credit losses, there were no major flags. The company went to lengths to explain it has very little exposure to some of the problems that have blindsided some subprime and Alt-A lenders. For example, BB&T's subprime exposure is to auto loans. A couple of years ago, the industry experienced a severe shakeout and many marginal players exited or went under. As a result, subprime auto loan pricing wasn't irrational the way it was in residential lending. Furthermore, losses are correlated with used car pricing (due to high repossession rates) and unemployment -- both of which have remained stable.
Subprime residential loans made up only 0.4% of BB&T's portfolio, and Alt-A mortgages accounted for 3.9%. The average Alt-A loan was made at 67% loan to value and had an average 734 FICO score, indicating very strong credit quality. Although BB&T has a fair amount of exposure to residential builders as a lender, management noted that the company works with local builders, who tend to know their markets and not get caught holding speculative unsold homes. BB&T remarked that so far, it hasn't had to take charge-offs in this space.
In terms of what the future holds, BB&T is always scouring the M&A space. The company is looking at community banks, insurance agencies, and consumer finance, but so far the prices it's seeing are too high. Management also reiterated that it is open to doing a merger of equals.
For further Foolishness:
- BB&T Doesn't Sweat Stormy Environment
- Foolish Forecast: Will BB&T Bend or Buckle Up?
- A Closer Look at BB&T
- Fifth Third Hopes to Turn the Corner
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.