BB&T Is a 'Top Pick' for Investors: Citi

NEW YORK ( TheStreet) -- In the midst of a very strong market rally for bank stocks and an improving interest rate outlook, most large regional names are "no longer cheap," but BB&T ( BBT) remains a solid pick, according to Citigroup analyst Keith Horowitz.

Friday's market euphoria following stronger-than-expected job growth numbers pushed the KBW Bank Index ( I:BKX) to a 52-week high of 63.94. The index has returned 25% this year, following a 30% return during 2012.

That's a remarkable run. At the end of 2011, it was fairly easy to look at large-cap U.S. bank stocks, with their remarkably low valuations, and say it was time to load up, but now things are getting more difficult.

On the positive side, long-term rates have increased sharply, with the rate on 10-year U.S. Treasury bonds increasing to 2.73% on Friday, from 1.70% at the end of April. This promises widening net interest margins for banks, but the large-cap banks will only see an "incremental benefit," according to Horowitz.

With "valuations that look full, very limited impact from higher rates on earnings in the near term and the forward curve already assuming 100 bp of rate hikes in 2015," Horowitz in a report on Sunday wrote that "we believe risk/reward is not favorable here and would not chase this rally."

Going With BB&T

There are three large-cap regional banks stocks that Horowitz considers "preferred plays heading into earnings," including BB&T, M&T Bank ( MTB) of Buffalo, N.Y., and Wells Fargo ( WFC). However, BB&T of Winston-Salem, N.C., is the only one the analyst rates a "buy."

BB&T's shares closed at $34.88 Friday, returning 22% this year, following a 19% return during 2012. Those, of course, are stellar numbers, but if you look at the one-year chart at the end of this article, you can see that the shares have significantly underperformed the KBW Bank Index and the S&P 500 ( SPX.X) over the 52-week period.

A major reason for the underperformance has been investors' discomfort following the Federal Reserve's rejection of BB&T's 2013 capital plan in March, on "qualitative" grounds. The bank submitted its revised plan on June 11, and the Fed will respond by Aug. 25. An approval of the revised plan could serve as a catalyst for the shares.

BB&T will report its second-quarter results on July 18. The consensus among analysts polled by Thomson Reuters is for the company to report earnings of 74 cents a share, increasing from 72 cents both in the first quarter and during the second quarter of 2012.

Horowitz estimates second-quarter EPS of 75 cents, expecting the company to beat the consensus "primarily on higher fee revenues with possibly better-than-expected insurance results." His full-year EPS estimate of 2013 is $2.50. The analyst on Sunday raised his 2014 EPS estimate for BB&T by a nickel to $3.15, which is slightly above the consensus EPS estimate of $3.11. Horowitz raised his 2015 EPS estimate by 15 cents to $3.60, which is out in front of the consensus 2015 EPS estimate of $3.37.

Based on the increased earnings estimates for 2014 and 2015 "on higher future rates incorporated in our forward yield curve," Horowitz raised his price target for BB&T to $40 from $30.00. That implies 15% upside over the next 12 months.

"We expect core PTPP growth of 6% y/y, driven by a 2% increase in revenues and flattish y/y expenses," Horowitz wrote. PTPP stands for "pre-tax, pre-provision" earnings. The provision for credit losses is the amount added to or taken from loan loss reserves each quarter, directly affecting the bottom line.

Horowitz expects higher property and casualty insurance prices to support 5% year-over-year growth for BB&T's insurance revenue, which totaled $365 million, or 15% of BBT's PTPP income during the first quarter. BB&T greatly expanded its insurance operations with the acquisition of Crump Group in April 2012.

BBT Chart BBT data by YCharts

Interested in more on BB&T? See TheStreet Ratings' report card for this stock.

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

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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.

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