This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Take Your Bank Pain Now and Gain Later: Street Whispers

Stocks in this article: BBTPNC

NEW YORK ( TheStreet) -- Investors need Zen-like patience when it comes to banks, especially when a short term profit hit means growth in the future.

A good example of this is BB&T (BBT) which last week issued $1 billion in perpetual preferred shares with a coupon of 5.625%. A costly move, preferred shares can often come at the expense of earnings that feed common shareholder returns.

Stifel Nicolaus analyst Christopher Mutascio on Monday lowered his 2012 earnings estimate for the Winston-Salem, N.C., lender by two cents to $2.78 a share, and his 2013 EPS estimate by six cents, to $2.99, "to account for the $56.3 million in annual dividends to be paid on the new preferred shares."

Mutascio said that "in isolation, the dividends tied to the recent preferred offering would reduce our EPS estimates by $0.08 annually. However, we assume the company invests the proceeds from the offering into investment securities initially with the eventual migration into loans."

BB&T's latest preferred offering -- which is noncumulative, meaning the dividend could be suspended without missed dividends in arrears being paid -- follows a $500 million preferred offering in April, with a coupon of 5.85%.

The company in June announced that it was redeeming its $3.1 billion in outstanding trust preferred securities, because the Federal Reserve's proposed capital rules would exclude trust preferred equity from regulatory capital was considered a "Capital Treatment Event."

BB&T will also see a nice benefit to its net interest margin, because most of the trust preferred shares redeemed this month had significantly higher coupons than the new perpetual preferred shares.

Guggenheim analyst Marty Mosby says that BB&T "is looking long term," in issuing the preferred shares now, because the 5.625% coupon "is a historically very low interest rate." A "cost of capital being below 6% is a significant advantage that they will have, to use going forward."

Mosby points out that under the Fed's proposed rules, "between 1% and 1.5% of your Tier 1 ratio can be things besides common equity," and that "BB&T right now can basically pull in a little less than $2 billion in perpetual preferred, which would use up the capacity, given their size."

Regarding earnings estimates, Mosby says the preferred equity raise will "definitely have, in the interim period, some incremental impact, but over time it will be very beneficial. The impact up front is fairly marginal."

Mutascio said his neutral rating on BB&T was based on valuation, with the shares trading at "10.8x our revised 2013 EPS estimate and 1.8x 2Q12 tangible book value per share of $17.79," and that "we currently find greater value in other regional banks with similar profitability measures, such as PNC Financial (PNC)," which he rates a "Buy."

"PNC trades at just 8.6x our 2013 EPS estimate of $6.90 and 1.4x 2Q12 tangible book value per share of $43.33," Mutascio said, adding that "we have a hard justifying the 23% and 33% gap on a P/E and P/TBV basis, respectively, between BBT and PNC," and "based on our current 2013 EPS estimates, we expect both companies to generate identical Return on Assets ratios of 1.20% in 2013."

Mosby also has a neutral rating for BB&T, with a $33 price target, estimating the company will earn $2.80 a share this year, followed by $3.21 during 2013.

RELATED STORIES:



-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs