Why is BB&T (BBT) up 1.5% since its last earnings report?

More than a month has passed since the company’s last earnings report BB&T Company BBT. Shares have risen about 1.5% in that time, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is BBT facing a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the key drivers.

BB&T’s fourth-quarter earnings beat the result thanks to higher revenues and rising costs

BB&T’s fourth-quarter 2017 adjusted earnings of 82 cents per share topped the Zacks Consensus Estimate of 80 cents. This figure did not include adjustments related to tax reform.

The results reflect revenue growth resulting from higher interest rates and loan growth. However, the weakening factor was the increase in operating costs and higher loan costs.

Net income available to common stockholders (GAAP) was $614 million, or 77 cents per share, compared to $592 million, or 74 cents per share, in the prior-year quarter.

2017 earnings of $2.74 per share declined 1.1% year over year. Net income available to common stockholders (GAAP) was $2.2 billion, down 1.7% from 2016.

Revenues are improving with moderate growth in loans and deposits

Total revenue (tax equivalent) for the quarter was $2.91 billion, up 5% year-over-year. The figure also surpassed the Zacks Consensus Estimate of $2.84 billion.

Total revenues for 2017 (taxable basis) increased 4.8% from the previous year to $11.5 billion. The figure was slightly above the Zacks Consensus Estimate of $11.4 billion.

Tax-equivalent net interest income increased 4.7% from the prior-year quarter to $1.68 billion. Additionally, net interest margin increased by 11 basis points (bps) compared to the prior-year quarter to 3.43%.

Noninterest income increased 5.4% year over year to $1.23 billion. The increase was driven by increases in all components of fee income, except insurance income and mortgage banking fees.

Noninterest expenses of $1.86 billion increased 11.2% compared to the same quarter last year. The increase was primarily due to increases in personnel costs, net costs related to mergers and restructuring and professional services costs.

BB&T’s adjusted efficiency ratio was 57.2%, compared to 58.3% in the prior-year quarter. A decrease in the efficiency ratio means an increase in profitability.

As of December 31, 2017, total deposits were almost $157.4 billion, a slight increase from the previous quarter. Total loans and leases of $144.8 billion also increased slightly on a sequential basis.

Improving credit quality

As of December 31, 2017, total non-performing assets (NPAs) stood at USD 627 million, representing a decline of 22.9% year-on-year. As a percentage of total assets, NPAs were 0.28%, down 9 basis points year-on-year.

Moreover, in this quarter, write-offs for losses on loans and leases amounted to 1.04% of all loans and leases intended for investment purposes, similarly to the previous year’s quarter. Moreover, net write-offs amounted to 0.36% of the average value of loans and leases, which means a decrease of 6 basis points year-on-year.

However, the provision for credit losses at quarter-end was $138 million, reflecting a 7% year-over-year increase.

Profitability ratios are strong, capital ratios are weaker

At the end of the reported quarter, the average rate of return on assets was 1.19%, compared to 1.16% in the previous year’s quarter. The average return on equity increased to 9.10% from 8.75% as of December 31, 2016.

As of December 31, 2017, the risk-based Tier 1 capital ratio was 11.8%, compared to 12.0% in the same quarter last year. BB&T’s estimated Basel III Common Equity Tier 1 capital ratio (based on the full phase-in rule) was approximately 10.0% as of December 31, 2017, compared to 10.2% as of December 31, 2016.

Share buyouts

During the reported quarter, BB&T repurchased $373 million of shares through open market purchases.

Perspectives

First quarter of 2018

Management forecasts that GAAP NIM will decline by 1-3 basis points on a sequential basis. Furthermore, the core margin is expected to remain stable due to the adjustment of tax-exempt assets due to the new change in the corporate income tax rate.

Fee revenues are expected to grow by 1-3% year-on-year.

Excluding merger and restructuring-related charges and other one-time items, management expects costs to remain flat year over year.

The Management Board expects the effective tax rate to be 21%.

The Management Board expects that the average value of total loans will increase sequentially by 1-3% on an annual basis.

The Management Board forecasts that NCO will increase sequentially and will be in the range of 35-45 basis points, assuming no deterioration in the economic situation. Loan loss provisions are also expected to match NCO numbers and also provide credit growth.

2018

Management expects revenues (on a tax equivalent basis) to increase by 2-4% year over year. An increase in average total loans is also forecast in the range of 2-4%.

Based on the assumptions of loan growth above and a stable securities book, revenue generating assets are expected to grow by approximately 3%.

Additionally, operating costs are expected to remain stable and the effective tax rate will be 21%.

How have estimates changed since then?

Over the last month, investors have seen an upward trend in new estimates. There was one revision higher in the current quarter, and looking back for an additional 30 days, we see even greater growth dynamics. There have been nine upward moves in the last two months. Last month, the consensus estimate moved 7.8% on these changes.

BB&T Corporation Price and Consensus

BB&T Corporation Price and Consensus | BB&T’s offer

VGM results

Currently, BBT has a solid growth score of B, although it lags significantly on the momentum front with a D. Plotting a somewhat similar path, the stock has also been given a C grade on the value side, placing it in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Our style scores indicate that the stock is more suitable for growth investors than value investors.

Perspectives

Interestingly, BBT carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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