Whether the sector is currently in favor or not, I firmly believe every investor should have some exposure to the banking industry in their portfolio. Traditional banks are the lifeblood of the economy, and in normal times pay good dividends, and have decent earnings growth. However, the last few years have been anything but “normal.” For a bank to outperform its peers is quite a feat in the current environment, and BB&T Corporation (NYSE:BBT) has been on quite a run over the last year or so.
I follow the banking sector pretty closely, and for good reason, I used to work for a bank. I spent over 10 years of my life working in the industry, and there are some misconceptions about the industry that require clarification. First, not every bank is a “Wall Street” bank. In fact, there are many regional banks that don’t have much connection to Wall Street at all. Second, many of these banks never got into the crazy sub-prime lending practices that drove so many to the brink of extinction. Third, many of these banks have decent people who are working very hard every day to make their clients more successful.
This being said, the short version of what makes a bank successful is growth in deposits and loans, and good credit quality. Deposit accounts not only provide cheap funding for loans, but some suggest deposit accounts can be more profitable than loans. BB&T faces stiff competition from many well capitalized banks, but the company seems to maintain the best mix of performance among the group.
The Lifeblood Of Any Bank
BB&T’s competition are banks like PNC Financial Services (NYSE:PNC), M&T Bank Corporation (NYSE:MTB), and U.S. Bancorp (NYSE:USB). When it comes to deposit growth, the leader in the current quarter was PNC with average deposits up 11%. However, PNC’s results are helped by the company’s RBC Bank acquisition. M&T Bank showed 10% deposit growth, and U.S. Bancorp showed 9.2% deposit growth in their recent earnings. While BB&T lagged their competition with 8.1% growth, the bank was one of the few to grow both checking accounts and savings account balances. In fact, BB&T grew non-interest deposits by 26.3%, and savings accounts were up 7.1%. As you can see, BB&T didn’t lead the pack, but they were not far off the pace either.
Loans are a second important category, as they provide not only fee income, but interest income over the life of the loan. PNC led the way in this category again with a 17% increase, but again the RBC acquisition skews these numbers a bit unfairly. M&T Bank performed well with 11% growth, followed closely by BB&T at 9.3%, and U.S. Bancorp at 9.1%. In similar fashion to their deposit performance, it wasn’t just BB&T’s loan growth that was impressive as the diversity of growth sources. BB&T increased commercial loans by 7.9%, direct consumer lending by 11.2%, and residential mortgage by 18.8%.
Still One Of The Best
While BB&T performed well in deposits and loans, where the bank really shines is in their credit quality. BB&T’s non-performing loans were 1.2% of the total portfolio in the current quarter. The only peer bank that reported better results was U.S. Bancorp at 1.1%. By contrast, M&T’s and PNC can’t compete, with non-performing loan percentages of 1.52% and 1.75% respectively.
Another area where BB&T is performing well is covering their non-performing loans. The most conservative bank among the four we’ve looked at is U.S. Bancorp with a 218% coverage ratio. BB&T comes in second with a ratio of 146%, followed by PNC at 124%, and M&T at 91.68%.
A Value That Can’t Be Beat
As you can see, though BB&T might not be the best at each measurement, they have strong performance in all areas. Where BB&T is a standout is, the stock’s relative valuation compared to their peers. Since each of these banks pays a dividend, I like to use a Peter Lynch method of comparing the companies that he referred to as the PEG+Y ratio. Think of it sort of like an inverted PEG ratio, as you take the expected growth rate, add the dividend, and then divide by the P/E ratio. Unlike the PEG ratio, with this measure, the higher the number, the better value.
Among BB&T’s competition, using this PEG+Y ratio, M&T is the least attractive value. With an expected growth rate of 8.1%, plus a 2.68% yield, if you divide that total by the current P/E of 12.46, you get a PEG+Y of 0.87. Remember, the lower the number, the worse the relative value. By comparison, PNC comes in only slightly better at 0.89, and U.S. Bancorp scores a 1.01. The clear leader of the pack is BB&T with a score of 1.33. The reason is pretty simple, BB&T has the highest yield, and highest expected growth rate among their peers. The bottom line is, investors have yet another chance to pick up shares in this top performing bank, and get a much better value than their peers. Strong performance across the board, and the best relative value, makes BB&T the Best Bank In Town.
The article Still The Best Bank In Town originally appeared on Fool.com and is written by Chad Henage.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
