BB&T ( BBT: NYSE)
By Sterne, Agee & Leach ($36.66, Oct. 27, 2014)
We are upgrading BB&T to Buy from Neutral and establishing a
$43 price target.
BB&T's (ticker: BBT) diversified revenue stream and lower
risk balance sheet is unique among the regional banks and should
drive multiple expansion over the next year. Specifically we are
attracted to the company's growing insurance business and lack of
exposure to leveraged lending. Looking ahead we see the potential
for earnings-per-share accretive bank acquisitions.
While BB&T was not immune to the real estate losses
witnessed across the banking industry during 2008-2009, it was able
to remain profitable each quarter during that period reflecting the
company's more prudent credit risk management. Coming out of the
financial crisis in a position of strength allowed BB&T to
expand through acquisitions in recovering and/or growing markets
like Florida and Texas.
BB&T is the fifth largest distributor of insurance products
in the U.S. Revenue here is commissions ($1.2 billion or 18% of
revenue year-to-date) and is diverse among retail and wholesale. We
are attracted to the consistency and lack of credit risk unlike
other fee-generating businesses at banks like mortgage and capital
markets. Based on revenue and earnings before interest, taxes,
depreciation and amortization (Ebitda) projections we feel
BB&T's insurance business is worth nearly $4 billion or 15% of
current market cap.
Since a joint agency report was issued last March there has been
a clear push by the regulators to reduce the underlying credit risk
or exposure banks have to leveraged lending (generally defined as
loans to borrowers with debt ratios exceeding six times Ebitda). We
are now hearing this will carry into the 2015 Comprehensive Capital
Analysis and Review and banks' abilities to return future capital.
For BB&T, the exposure to this lending area is de minimis.
Just last month BB&T announced it was buying another 41
branches in Texas from a larger competitor and acquiring a $1.8
billion in assets bank in Kentucky. Both were accretive to
earnings. Management of BB&T talked up their ability to do more
bank acquisitions in many of their existing markets. We believe
sellers are out there and that future deals would be accretive to
BB&T's earnings. With under $200 billion in assets there is
room for this type of growth, in our view.
Since mid-2013 there has been some level of uncertainty about
BB&T's ability to control expenses and in fact last quarter,
excluding one-time items, operating expenses came in above our
estimate and management's guidance. We are modeling fourth-quarter
2014 expenses of $1.39 billion reflecting lower personnel and
loan-related costs. Greater clarity and belief in management's
efficiency ratio target would be another catalyst for BB&T.
--Terry McEvoy
--Erik Zwick
--Austin Nichols
The companies mentioned in Hot Research are subjects of research
reports issued recently by investment firms. Their opinions in no
way represent those of Barrons.com or Dow Jones & Company, Inc.
Share prices at the time the report was issued and the date of the
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