BB&T's (BBT) Q2 Earnings Beat As Revenues Rise, Expenses Up

BB&T Corporation’s (NYSE:BBT) second-quarter 2019 adjusted earnings of $1.12 per share surpassed the Zacks Consensus Estimate of $1.08. The bottom line also represented 11% growth from the year-ago figure.

Results benefited from rise in revenues, driven by loan growth and relatively higher interest rates. However, higher provision for credit losses and rise in expenses were major headwinds.

Results excluded merger-related and restructuring charges and incremental operating expenses related to the merger. After considering these, net income available to common shareholders was $842 million or $1.09 per share, up from $775 million or 99 cents per share in the prior-year quarter.

Revenues Improve, Expenses Increase

Total revenues were $3.04 billion, up 6% year over year. Also, the figure beat the Zacks Consensus Estimate of $2.98 billion.

Tax-equivalent net interest income increased 2% from the prior-year quarter to $1.71 billion. Net interest margin declined 3 basis points (bps) to 3.42%.

Non-interest income increased 11% year over year to $1.35 billion. This upside stemmed from an increase in insurance income, mortgage banking, and investment banking and brokerage fees and commissions.

Non-interest expenses were $1.75 billion, up 2% from the year-ago quarter. This increase was primarily due to rise in personnel expense, loan-related expense and software costs, partially offset by lower regulatory costs.

BB&T’s adjusted efficiency ratio was 55.1%, down from 57.4% in the year-ago quarter. A fall in efficiency ratio indicates rise in profitability.

As of Jun 30, 2019, average deposits were nearly $159.9 billion, down slightly from first-quarter 2019 level. Average total loans and leases of $150.5 billion were up 2% from the prior-quarter end.

Credit Quality: A Mixed Bag

As of Jun 30, 2019, total non-performing assets (NPAs) were $523 million, down 16% year over year. As a percentage of total assets, NPAs came in at 0.23%, down 5 bps. Also, allowance for loan and lease losses was 1.05% of total loans and leases held for investment, unchanged year over year.

However, provision for credit losses jumped 27% year over year to $172 million at the end of the reported quarter. Further, net charge-offs were 0.38% of average loans and leases, up 8 bps.

Profitability & Capital Ratios Improve

At the end of the reported quarter, return on average assets was 1.55%, up from 1.49% in the prior-year quarter. Return on average common equity was 11.98%, up from 11.74% as of Jun 30, 2018.

As of Jun 30, 2019, Tier 1 risk-based capital ratio was 12.0%, up from 11.9% recorded in the year-ago quarter. BB&T's estimated common equity Tier 1 ratio under Basel III was approximately 10.3% as of Jun 30, 2019, up from 10.2% as of Jun 30, 2018.

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Our Take

BB&T remains well positioned for revenue growth through continued loan growth (as witnessed in the reported quarter). Its announced merger deal with SunTrust Banks (NYSE:STI) is expected to be accretive to earnings and will result in substantial cost savings.

Nevertheless, the company’s significant exposure to risky loans remains a concern. Also, mounting operating costs are likely to continue hurting bottom-line growth to some extent.