Southeast regional banking giant BB&T (NYSE:BBT) has never been particularly worried about quarter-to-quarter performance, as this typically conservative bank runs itself for the long haul.
Even so, while BB&T's recent earnings report was underwhelming, the bank's net interest income trailed peers like JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) -- only improving credit and good expense management kept the bank from losing too much ground.
Typically a Rodney Dangerfield-esque stock that long didn't seem to get its due, BB&T's stock doesn't look all that cheap right now. BB&T is still a solid stock to hold as a long-term core holding, but Fools may find better value in JPMorgan or Wells Fargo today. Here's why.
Its core isn't that strong
There wasn't much reason to think that this was going to be a strong quarter for BB&T, but the bank nevertheless disappointed a bit on its revenue, particularly its net interest income.
Net interest margin contracted a little more than management had previously expected.
Revenue declined slightly on a sequential basis, trailing those three comps that had previously reported. Net interest income fell 4% on a 12bp decline in net interest margin, while fee income rose 5% on a good result in the insurance business.
Like JPMorgan, Bank of America, and Wells Fargo, BB&T saw a sizable year-on-year decline in mortgage banking revenue (down 57%).
Solid credit, soft lending
BB&T did pretty well with its credit this quarter, and that helped to counterbalance the net interest income and expense disappointments.
JPMorgan, Wells Fargo, and Bank of America all saw better than 20% year-on-year declines in non-performing loans, but BB&T's fell 32%. With that, the bank's non-performing asset ratio plunged to 0.92%, well ahead of its peer group, and the NCO ratio dropped almost by half, to under 0.7%.
Non-covered loan growth was disappointing, up just 1% this quarter. Where other banks are seeing a pick-up in commercial and industrial lending, BB&T's loan growth and guidance for the next quarter were soft. While that sounds sub-optimal, this could be a result of BB&T being more selective.
Since competition for C&I lending has heated up and the credit quality is not improving at the same rate, some of these banks reporting stronger loan growth may pay for it later in terms of charge-offs.
Building for the long haul
Even if lending conditions are so-so today, BB&T is playing the long-term game. The bank recently acquired 21 branches in Texas from Citigroup, paying a relatively modest 4.25% deposit premium for $1.2 billion in deposits.
These branches were non-core to Citi and have substandard loan-to-deposit ratios, but the deal does boost BB&T from 35th to 20th in deposit share in Texas -- and for a reasonable price (something that has historically been tough to do in Texas).
Despite this deal, BB&T may not be done with Texas. BB&T should get some scale benefits from this acquisition, but at just 0.5% deposit share, BB&T is a minor player in the state compared to JPMorgan (19% share), Wells Fargo (over 14% share), and Bank of America (over 12%) share.
The bottom line
The first half of 2014 could be sluggish for BB&T, but the bank has nice leverage to an economic recovery in the Southeast, not to mention its comparatively high NIM, its low-cost deposit base, and its large insurance operations. The company's focus on specialty lending (equipment finance, etc.) and its strong focus on core banking operations (as opposed to prop trading, etc.) is also a plus.
All of that said, it's just not a tremendous bargain today. Given BB&T's returns on equity and its price today, investors may have a hard time earning a market-beating return.
With a history of good risk management and generous dividend policies, the shares could deserve a spot on the watchlist of an investor who's hungry to get a good business at a slightly better price.