You know you're in a banking crisis when a near one-fifth decline in earnings per share (EPS) is met with a greater than 3% increase in your stock price. That was the case at BB&T (NYSE:BBT) yesterday, after it announced $0.65 in diluted EPS in the third quarter. Keep in mind that a one-fifth drop was much, much better than the performance of retail/commercial banking at JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C), which also reported earnings this week.
Credit losses are up, but the balance sheet is steel-plated
In a crisis, however, there are dark linings to any silver cloud. Non-performing assets and credit losses increased and BB&T's loan loss provisions trebled with respect to the prior year to $364 million. That's not comforting at a time when we should expect loan default rates to continue rising as the economy worsens – it'll be worth tracking that number.
Despite this, BB&T's balance sheet remains very solid, with a Tier 1 capital ratio of 9.4%. The same ratio for two pillars of U.S. banking, JPMorgan and Bank of America (NYSE:BAC) is 8.9%, 7.5%, respectively.
Crisis can spell opportunity for well-managed, well-capitalized banks. Indeed, under normal circumstances, it's fiendishly difficult for a bank to pry away customers from competitors – bank deposits are very "sticky." However, at a time when banks are failing or being forced into mergers, and customers are uncertain regarding the safety of many institutions, the most reputable banks can make market share gains.
BB&T appears to be doing just that, with the average growth rate in client deposits accelerating to 16% on an annualized basis. Banks like National City (NYSE:NCC), Wachovia (NYSE:WB) (and Wells Fargo (NYSE:WFC), which is acquiring Wachovia's deposits), had best watch themselves.
Looking back to the last bond market rout for clues
BB&T's stock is currently changing hands at 14.5 times the lowest estimate for next year's earnings and just 1.42 times book value. Prior to the start of the credit crisis, the last time its book value multiple was lower than this (April 1995), the stock went to on to significantly outperform its peers and the broader market. Of course, the future may turn out to be quite different than the past – after all, the current crisis has no precedent in recent memory. Still, my bets are made.
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