BB&T Corporation (BBT), Fifth Third Bancorp (FITB), SunTrust Banks, Inc. (STI): Regional Banks Presenting an Investment Opportunity

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The fourth quarter results at some of the major US banks remained strong. The overall aggregate earnings were down moderately from the linked quarter still better than a year ago. Among potential headwinds for the US regional banks are record low interest rates, a sluggish US economy and increased regulatory burden. Other trends seen at some of the major regional banks during the fourth quarter are as follows:

BB&T Corp

BB&T Corporation (BBT)

BB&T Corporation (NYSE:BBT) reported solid net income of $506 million for the fourth quarter, up 7.9% compared to the linked quarter. The surge in the bottom line was a result of increases in mortgage banking and insurance income during the quarter. Commercial and industrial loans, direct retail loans, and residential mortgage increased. Asset quality during the quarter remained mixed as other real assets owned declined 12% and non-performing assets as a percentage of loans plus OREO increased 2.1%.

Bull Case: An above average loan growth can be expected driven largely by commercial and industrial specialized lending. Also, the environmental non-interest expenses are expected to decline further as non-performing loans and OREO decline, which will further benefit BBT. However, BB&T Corporation (NYSE:BBT) is considered to be the least asset sensitive bank among the regional banks. Therefore, if interest rates increase, you should expect less upside in the bank’s EPS.

Fifth Third Bancorp

Fifth Third Bancorp (NASDAQ:FITB) reported adjusted net income of $393 million for the fourth quarter, compared to $383 million in the third quarter of 2012. The increase in earnings was attributed to lower credit costs and solid performance in core non-interest income. Non-interest income surged higher on corporate banking and strong mortgage results. During the fourth quarter, the net interest margin compressed 7 bps to 3.49% due to lower asset yields.

Revenues accruing from mortgage banking increased 29% on higher mortgage originations, partially offset by weaker gain on sale margins. Overall, loans portfolio increased 1% over the linked quarter on higher commercial and industrial and residential mortgages, partially offset by lower commercial real estate and home equity. Credit quality improved during the quarter as annualized net charge-offs declined 5bps, while non-performing assets declined to less than 4% due to improving trends in commercial loans. The credit quality at Fifth Third Bancorp (NASDAQ:FITB) is expected to improve further in the coming quarters as the bank reduces its exposure to troubled real estate markets in the Midwest and Southeast regions.

Going forward, you can expect strong loan growth and continued strength in the bank’s commercial and industrial lending with the launch of healthcare and energy verticals contributing to growth. The bank will also be a near term beneficiary of a strong mortgage banking growth. Also, the improving credit quality can lead to further share buybacks.

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