Sometimes banking is made more complicated than it needs to be. A successful bank can attract deposits, make loans, manage its credit quality, and be an excellent investment. While it’s true that this business plan isn’t very exciting, if there is one thing that is not needed in banking it’s excitement. Usually when people get excited about a bank it means something bad happened. Unfortunately, one of my favorite banks, BB&T Corporation (NYSE:BBT) seems to be losing focus of what is important.
Before we look at what BB&T Corporation (NYSE:BBT) is doing well, and what they can do better, maybe the question should be asked, why BB&T Corporation (NYSE:BBT) at all? The quick answer is, BB&T Corporation (NYSE:BBT) has consistently outperformed its peers by multiple measures over the last few years. They are a traditional bank, in the sense that they don’t do huge debt offerings overseas, they didn’t get into the sub-prime lending mess, and they stick to banking, insurance, and investments.
BB&T Corporation (NYSE:BBT)’s peers include the very big banks like JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), and U.S. Bancorp (NYSE:USB). Each of these companies are looking to build out their branch network. These companies would love to capture more business in the Southeastern part of the U.S., where BB&T Corporation (NYSE:BBT) has a significant presence. These competitors also have something else in common, they are generally well-respected institutions and are well know to investors. BB&T on the other hand, is a very big bank that few people seem to pay attention to. When companies are ignored, there usually is opportunity.
What do they do well?
The main strength of BB&T’s operation is their Community Banking business. This division is comprised of the bank’s branch network, including their retail and business lenders. BB&T generated 42.83% of their net income from Community Banking in the current quarter.
While it makes sense on the surface for BB&T to try and expand their insurance and investment operations to provide revenue diversity, I would prefer the bank stick to what it does best. BB&T is a deposit and loan growth machine. In the current quarter, BB&T grew average deposits by 4.7% and average loans by 5.3%. While it’s true that BB&T’s peers grew overall deposits faster, the quality of BB&T’s deposit growth was unmatched.
Looking at BB&T’s peers, U.S. Bancorp (NYSE:USB) and JPMorgan Chase & Co. (NYSE:JPM) posted 7.3% and 7% total deposit growth. By comparison, Wells Fargo & Co (NYSE:WFC) saw total deposits increase by 6.36%. However, most of BB&T’s competition saw savings and money market accounts grow faster than non-interest bearing accounts. BB&T, on the other hand, reported an almost 15% increase in total checking accounts, and an over 24% increase in non-interest bearing accounts.
Not surprisingly, BB&T’s net interest margin leads their peers at 3.78%. By comparison, U.S. Bancorp and Wells Fargo & Co (NYSE:WFC)’s net interest margin is 3.48%, and JPMorgan Chase & Co. (NYSE:JPM)’s margin is much lower at 2.36%. If BB&T continues to grow non-interest bearing accounts at a rate faster than overall deposits, their margin should continue to outperform their peers in the future.
No one does this better
BB&T continues to outperform their competition when it comes to non-performing loans. Wells Fargo & Co (NYSE:WFC) gets a lot of positive press about its lending operations, but with a non-performing loan percentage of 2.44%, Wells Fargo & Co (NYSE:WFC)’s comes in dead last. JPMorgan Chase & Co. (NYSE:JPM) is doing much better with a 1.6% ratio, and U.S. Bancorp scores even better with a ratio of just 1.35%. However, none of these companies can match BB&T at just 1.12%. In addition, BB&T’s total dollar value of non-performing loans decreased by more than 37%, a faster decrease than any of their peers.
BB&T’s small non-performing loan percentage is made even more impressive by the fact that they have set aside enough to cover 130% of these problem assets. If the bank’s problem loans continue to decline, they may be able to release even more of this reserve, which would add to earnings.
There are still two problems
The two issues I’ve noticed with the bank are fairly easy to see, and very easy to fix. The problem is, I don’t know if management wants to address these problems.
First, BB&T has been pushing hard for its lenders to get business loans. Not only are the dedicated business lender’s goals increasing, but traditional retail lenders are being given business-related loan goals as well. There are two big problems with this idea. The first is retail loans and traditional mortgage loans are growing faster than commercial loans. In the current quarter, retail loans grew by 7.1% and mortgage grew by 12.2%. By comparison, commercial loans grew by 3.88%.
The second part of this problem is, retail loans and mortgage loans carry much better yields than commercial loans. The bank’s average yield on commercial loans is about 3.8%. By comparison, BB&T’s mortgage loans yield 4.26% and retail loans yield 4.72%. When loans are growing faster and have better yields, you put your focus on that segment.
The second issue is more of an accounting question. BB&T has $28 billion in securities that are currently yielding 50% less than the company’s long-term debt cost. I’m not sure why the bank feels it’s a good idea to carry long-term debt, and then have these securities paying a yield of half as much.
The bottom line is, BB&T can make a lot of money for investors by just being a good old fashioned traditional bank. However, if management pushes employees toward loans that aren’t as profitable, and can’t manage the balance sheet appropriately, the stock could be held back. If you want to keep up with developments at BB&T, consider adding the symbol BBT to your personalized Watchlist today.
The article This Great Bank Needs To Focus on Its Strengths originally appeared on Fool.com and is written by Chad Henage.
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