NEW YORK (
) -- 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
(BBT - Get Report)
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
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 - Get Report)
," 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.
Written by Philip van Doorn in Jupiter, Fla.