We have downgraded our recommendation on BB&T Corp. (BBT) to Underperform from Neutral. The rating change in based on deteriorating credit quality and concerns related to rising non-interest expenses.
BB&T’s second quarter 2010 operating earnings of 33 cents per share were in line with the Zacks Consensus Estimate. However, operating earnings were favorable compared to the prior quarter and prior-year quarter. Including merger related expense of 3 cents, earnings stood at 30 cents.
Second quarter results were supported by a lower provision for credit losses, strong fees and commissions, improved insurance income and moderate growth in net interest income along with an increase in average client deposits. However, higher non-interest expense and weakness in mortgage banking operations were among the negatives.
BB&T has a significant exposure in residential mortgage loans, direct retail residential loans, sales finance and revolving credit loans. So we remain concerned regarding an increase in the provision for credit losses from these loans in the near- to mid-term, given the current challenging housing market conditions.
The company continued to experience significant credit deterioration in the last few quarters largely due to challenges in residential real estate markets, with the largest concentration of credit issues occurring in Georgia, Florida, and metro Washington, D.C. Thus, credit quality remains a major concern for the company.
BB&T’s non-interest expense is persistently showing an uptrend as additional hiring and branch-building are likely to occur in the near term. This is expected to persist for the next few quarters as it will be difficult to curtail such expenses.
However, a steady improvement in loans and deposits is expected to fuel growth at BB&T. Also, the company remains focused on building client relationships as this is expected to perk up the quality of its deposits and help in improving fee based revenues. At the time when national peers are downsizing their footprint and small banks are struggling to stabilize their financials, we expect BB&T to gain market share.
Estimate Revision Trends
Over the last 30 days, 2 of the 27 analysts covering BB&T have downgraded the estimate for the third quarter of 2010. Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of 25 cents per share, an increase of 9.82% from the year-ago quarter.
For the full year 2010, 3 out of 29 analysts have reduced their estimates, while only 1 upward revision was witnessed. The Zacks Consensus Estimate for full year 2010 is operating earnings of $1.17, up 1.71% from the prior year.
With respect to earnings surprises, the stock has been volatile over the trailing four quarters, with one negative surprise. The average remained positive at 14.43%, implying that BB&T has beaten the Zacks Consensus Estimate by the same magnitude over that period.
The downside potential for the third quarter and full year 2010 Zacks Consensus Estimates, essentially a proxy for future earnings surprises, currently stand at 36.00% and 12.82%, respectively.
The estimate revision trends clearly reflect the potential for a significant downward pressure on the stock over the near term. This justifies the current Zacks #5 Rank (Strong Sell) for BB&T.
BB&T CORP (BBT): Free Stock Analysis Report
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