BB&T Upgraded to Neutral

We are upgrading our recommendation on BB&T Corp. (BBT) to Neutral from Underperform based on its balanced growth structure, continuous improvement in deposit mix and strong net interest margin (NIM).

BB&T’s third quarter 2010 adjusted earnings came in at 31 cents, a nickel ahead of the Zacks Consensus Estimate. Adjusted earnings for the reported quarter leave out merger-related charges of 1 cent per share. Considering this non-recurring item, earnings per share for the reported quarter were 30 cents compared with 23 cents in the year-ago quarter.

The results were primarily supported by improved mortgage banking income, checkcard fees, non-deposit fees and commissions and higher net interest income.However, higher provision for credit losses and increased non-interest expenses were among the negatives.

BB&T relies extensively on acquisitions to expand its revenue streams. Following the systems conversion of Colonial in the second quarter of 2010, the company is aspiring to be an active acquirer once the Southeast region experiences consolidation. The company also continues to employ a de novo growth strategy in certain markets. Since 2009, the company has started focusing on its organic growth strategy as well, which is evident from the growth in client deposits and increase in interest incomes. Going forward, management expects to maintain this balanced growth structure.

Continued improvement in NIM is another major strength of BB&T. Lower deposit costs primarily helped improve NIM over the last few quarters. Following the systems conversion of Colonial, higher yields on loans purchased from the failed bank are further helping boost NIM. Though there could be NIM pressure with the shrinkage of Colonial-related accretion, we expect lower deposit costs to keep the overall upward momentum intact.

However, though non-interest expenses decreased 6% sequentially during the third quarter of 2010, these expenses continue trending upward and are expected to remain high. Additional hiring and branch-building are likely to occur and make it difficult to prevent or reduce the growth of expenses.

Credit quality remains a major concern for the company. BB&T has experienced significant credit deterioration during the last few quarters, largely driven by continued challenges in residential real estate markets with the largest concentration of credit issues occurring in Georgia, Florida, and metro Washington, D.C. We expect overall credit costs to remain elevated until inflows show better trends.

BB&T currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. BB&T’s peers SunTrust Banks Inc. (STI) and State Street Corp. (STT) also share the same rank.

BB&T CORP (BBT): Free Stock Analysis Report

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