BB&T Is Still a Strong Hold

NEW YORK ( TheStreet) -- Despite what has been a clear trend of solid operational performances, there was always something gnawing at me about BB&T ( BBT).

Although BB&T's management has a solid reputation and has been working diligently to streamline the bank's operations, I didn't believe BB&T had enough oomph to be an outperformer. Plus, it didn't help that the bank posted an 8% decline in pre-provision net revenue (PPNR) in the April quarter. PPNR is the financial sector's equivalent of operating income.

The 8% decline in PPNR told me that although progress was being made, BB&T management was under pressure to heighten more cost-cutting measures. Last but not least, the April quarter also revealed signs of struggle in both residential and commercial lending.

With these issues at hand, I didn't go out of my way to fully endorse shares of BB&T ahead of the bank's second-quarter earnings report. My recommending the stock as a "hold" turned out to be a good call. While I'm still not ready to buy this stock at these levels, I'm willing to concede that progress is being made.

After having studied the recent earnings results from high-profile banks such as JPMorgan Chase ( JPM) and Bank of America ( BAC), I've taken a different perspective on BB&T. For instance, it didn't bother me as much that BB&T only posted 1% year-over-year growth in revenue. Soft revenue has been a consistent trend within the sector. Besides, the 1% increase was still enough to beat Street estimates by as much as 3%.

Elsewhere, BB&T posted a net interest margin (NIM) of 3.4%. It's not a great number, especially when considering that NIM was six basis points worse than the April quarter. But on a relative basis, that number held its own against money-center giant Wells Fargo ( WFC), which posted a NIM of 3.46%. It was also a pleasant surprise that BB&T's posted 7% sequential increase in adjusted income, helped by a better-than-expected performance in its fee businesses.

If you've been following my articles of late, fee income has been a struggle across each of the "big four" banks, including Citigroup ( C). While the entire sector struggled with mortgage lending, as did BB&T (down roughly 7%), BB&T is finding ways to offset the sluggishness in other areas such as insurance, which generated roughly 40% to BB&T's fee income. In that regard, management deserves plenty of credit. But it wasn't all good news.

My prior concern about PPNR hasn't improved. While BB&T's overall operation seems more stabilized, it's nonetheless hard to defend how badly BB&T missed. Depending on whose estimates you're following, the PPNR shortfall was as high 8 cents. This seems to be a recurring theme. I'm not going to ignore that the 5% sequential increase in expenses didn't have a hand in the PPNR miss.

This brings up an interesting situation, however, and I don't want to speak out of both sides of my mouth. I know I've been praising the likes of JPMorgan and Wells Fargo, which have executed strongly due, in part, to conservative cost-cutting measures. I've said this while offering the caveat of how difficult it is to cut expenses while still trying to grow in a competitive banking environment.

So with that in mind, I'm willing to excuse BB&T here for the rise in expenses. Nor should it be an automatic slap on the wrist any time a bank's expenses rise. What's more, it doesn't escape me that the 5% increase in expenses coincided with BB&T's 3% beat on revenue. Equally impressive was the 4% year-over-year growth in loans. It's not a breathtaking number. But it also means that BB&T is not lagging behind its peers.

Essentially, management spent more this quarter to grow sales. Like it or not, this is a situation where I'm willing to accept the good with the bad. On the more positive side, progress continues to be made in synergizing BankAtlantic, which BB&T acquired last year. So, I don't expect the bank's struggles will persist for very long.

But until then, I'm going to remain "lukewarm" about these shares, which, in my opinion are now fairly priced.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

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