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BB&T Corp.’s (BBT - Analyst Report) fourth-quarter 2012 earnings of 71 cents per share came a penny ahead of the Zacks Consensus Estimate. Moreover, this outpaced the prior-year quarter’s earnings of 55 cents.

In 2012, BB&T reported earnings of $2.70 per share, lagging the Zacks Consensus Estimate by a penny. However, this surged 48% from the last year’s earnings of $1.83.

Growth in revenue and a fall in operating expenses, partially offset by slightly higher provision for credit losses, were mainly responsible for the improvement in the quarterly results. Further, overall credit quality showed improvement, while capital as well as profitability ratios were stable. Moreover, accelerating growth in loans and low-cost deposits were impressive.

Net income available to common shareholders in the fourth quarter was $506 million, augmenting 29.4% from $391 million in the prior-year quarter. For 2012, net income stood at $1.9 billion, increasing 48.6% year over year.

Performance in Details

BB&T reported fourth-quarter total revenues of $2.53 billion, up 5.1% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $2.46 billion.

In 2012, total revenue of $9.83 billion grew 12.1% from $8.77 billion in 2011. Additionally, it was ahead of the Zacks Consensus Estimate of $9.53 billion.

Tax-equivalent net interest income escalated 1.6% year over year to $1.51 billion. The increase was attributable to lower funding costs.

However, net interest margin fell 18 basis points (bps) year over year to 3.84%. The decline reflects lower yields on new loans and securities as well as covered loan run-off, partly offset by the lower funding costs.

Non-interest income surged 10.6% year over year to $1.02 billion. The surge was largely buoyed by higher mortgage banking income and insurance income.

Non-interest expense decreased 8.0% year over year to $1.49 billion. The fall was mainly attributable to a decrease in foreclosed property expense, partially offset by a rise in personnel expense as a result of the Crump Insurance and BankAtlantic acquisitions.

BB&T’s efficiency ratio in the reported quarter stood at 55.3%, rising marginally from 53.5% in the prior-year quarter. The increase indicates deterioration in profitability.

Average deposits for the reported quarter accelerated 8.1% year over year to $131.8 billion. Similarly, average loans held for investment stood at $113.6 billion, up 7.3% year over year.

Credit Quality

BB&T’s credit quality continued to show improvements. As of Dec 31, 2012, total non-performing assets (NPAs) declined 10.6% sequentially and 37.3% year over year to $1.54 billion due to decreases in non-performing loans and foreclosed real estate and other foreclosed property. As a percentage of total assets, NPAs came in at 0.85%, down 12 bps sequentially and 60 bps year over year.

Similarly, net charge-offs were 1.04% of average loans and leases, down 4 bps from the prior quarter and 42 bps from the year-ago quarter. Further, the allowance for loan and lease losses was 1.70% of total loans and leases held for investment, excluding covered loans, down from 1.73% as of Sep 30, 2012, and 2.05% as of Dec 31, 2011. The decrease was primarily driven by improvement in the overall quality of the loan portfolio.

However, provision for credit losses was $256 million, up 14.8% compared with $223 million in the prior-year quarter. The rise reflects a smaller reserve release in the reported quarter.

Profitability and Capital Ratios

Profitability metrics exhibited an improvement in 2012. As of Dec 31, 2012, return on average assets stood at 1.14% compared with 0.82% in the prior year. Also, return on average common equity improved to 10.35% from 7.49% in 2011.

In 2012, BB&T's capital levels remained stable. As of Dec 31, 2012, the Tier 1 risk-based capital ratio and tangible common equity ratio were 11.4% and 6.9%, respectively, compared with 12.5% and 6.9%, as of Dec 31, 2011.

BB&T's Tier 1 common capital ratio, under the currently proposed Basel III capital standards, was 8.0% as of Dec 31, 2012 based on the proposed U.S. rules.

Peer Performances

The Bank of New York Mellon Corp.’s (BK - Analyst Report) fourth-quarter 2012 earnings came in line with the Zacks Consensus Estimate. However, this compares unfavorably with prior-quarter earnings of 61 cents. The quarterly results were adversely impacted by lower top line and higher operating expenses on a sequential basis. However, asset quality continued to show improvements and capital ratios remained healthy. Further, BNY Mellon’s asset position improved.

M&T Bank Corporation’s (MTB - Analyst Report) fourth-quarter 2012 operating earnings of $2.23 per share beat the Zacks Consensus Estimate of $2.17. Better-than-expected results were aided by an increased top line. Moreover, capital ratios showed improvements. However, an increase in expenses and deterioration in credit quality metrics were the headwinds for the quarter.

Our Viewpoint

The growth story at BB&T is impressive, following its organic expansion as well as acquisitions. The efforts to diversify from a concentration in real estate lending continues to progress well, with BB&T reporting an increase in average commercial and industrial loans, while reducing its other real estate loan balances.

However, BB&T has a wide exposure to problem assets. The current protracted economic recovery, continuous increase in operating expenses and various regulatory issues will make it difficult for the company to significantly improve its top line.

BB&T currently retains a Zacks Rank #3 (Hold). Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

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