BB&T's (BBT) Q2 Earnings Beat, Revenues Up Year Over Year

A notable rise in top line drove BB&T Corporation’s (NYSE:BBT) second-quarter 2016 adjusted earnings of 71 cents per share. This comfortably beat the Zacks Consensus Estimate of 65 cents.

An improved net interest income and non-interest income led to the better-than-expected results. Further, loans and deposits witnessed a strong growth. However, higher operating expenses and a rise in provision for credit losses were the headwinds.

Results excluded certain merger-related and restructuring charges. After considering these, net income available to common shareholders was $541 million or 66 cents per share, compared with $454 million or 62 cents per share in the prior year quarter.

Quarter in Detail

Total revenue (taxable equivalent basis) amounted to $2.79 billion, up 17.7% year over year. The Zacks Consensus Estimate for revenues was $2.74 billion.

Tax-equivalent net interest income rose 22.9% year over year to $1.66 billion. Further, net interest margin increased 14 basis points (bps) from the prior-year quarter to 3.41%.

Non-interest income increased 10.9% year over year to $1.13 billion. One major contributor for this increase is the rise in insurance income on account of acquisitions.

Non-interest expense of $1.80 billion was up 8.7% from the year-ago quarter. This rise is attributable to higher expense in many items mainly due to acquisition activity, as well as due to rise in other expense.

BB&T’s efficiency ratio came in at 59.3%, up from 59.2% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability.

As of Jun 30, 2016, average deposits grew 21.6% year over year to $160.3 billion. Further, average loans and leases totaled $143.1 billion, up 17.2% year over year.

Credit Quality

BB&T’s credit quality witnessed deterioration during the quarter. Provision for credit losses increased 14.4% year over year to $111 million.

Also, as of Jun 30, 2016, total non-performing assets (NPAs) rose 21.5% year over year to $886 million. As a percentage of total assets, NPAs came in at 0.40%, up 2 bps year over year.

Net charge-offs were 0.28% of average loans and leases, down 5 bps year over year. Allowance for loan and lease losses came in at 1.06% of total loans and leases held for investment, down 13 bps year over year.

Profitability and Capital Ratios

Profitability metrics improved during the quarter. As of Jun 30, 2016, return on average assets was 1.06%, unchanged year over year. Return on average common equity rose to 8.21% from 8.20% as of Jun 30, 2015.

BB&T's capital ratios displayed weakness. As of Jun 30, 2016, Tier 1 risk-based capital ratio and tangible common equity ratio were 11.7% and 7.6% respectively.

BB&T's estimated common equity Tier 1 ratio under Basel III (on a fully phased-in basis) was approximately 9.8% as of Jun 30, 2016.

Our Take

We believe that BB&T’s growth trajectory will continue on the back of a robust loan and deposits improvement as well as a series of acquisitions. The inorganic growth will help the company generate operating leverage, going forward.

However, margin compression led by a prevalent low interest rate environment, weak cost-control and heightened regulatory issues will keep profitability under strain in the near term.

Currently, BB&T carries a Zacks Rank #3 (Hold).

Performance of Other Major Regional Banks

Comerica Inc. (NYSE:CMA) recorded a 13.2% positive earnings surprise for second-quarter 2016 on higher interest income. The company reported adjusted earnings per share of 77 cents, beating the Zacks Consensus Estimate of 68 cents. Moreover, the reported figure compared favorably with the prior-year quarter earnings of 73 cents.

JPMorgan Chase & Co. (NYSE:JPM) reported second-quarter 2016 earnings of $1.55 per share, outpacing the Zacks Consensus Estimate of $1.43, primarily driven by improved fixed income and equity trading revenues, and rise in mortgage banking fees. Further, higher net interest income, perhaps attributable to the rise in loan demand and favorable impact from the Fed’s Dec rate hike supported top line.

Wells Fargo & Company’s (NYSE:WFC) second-quarter 2016 earnings recorded a negative surprise of about 1%. Earnings of $1.01 per share lagged the Zacks Consensus Estimate by a penny. Moreover, it compared unfavorably with the prior-year quarter’s earnings of $1.03 per share.