Fitch Affirms BB&T Corporation's LT IDR at 'A ' Following Large Regional Bank Review; Outlook Stable
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).
Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS
IDRs, VRs, AND SENIOR DEBT
The affirmation reflects the consistency of the company's performance, conservative risk appetite, and its sound risk management practices.
BBT's profitability metrics compare favorably to the large regional bank peer group, and benefit from good sources of non-interest income, an efficient cost structure and some acquisition-related purchase accounting accretion. Given BBT's fee income and solid efficiency levels, Fitch still expects BBT to outperform its peers. BBT's long-term return on asset (ROA) objective is between 1.3% and 1.5%, with a targeted efficiency ratio of between 53% and 55%. Fitch views these targets as very attainable, especially under a better interest rate environment.
BBT's insurance franchise is considered one of the company's key franchise strengths, as the sixth largest insurance agency/broker in the world. Fitch views BBT's insurance line of business favorably, as it supports a great deal of revenue diversity with strong margins. In first half of 2015 (1H15), income from BBT's insurance agency/brokerage operations accounted for 19% of revenues and 12% of consolidated net income, while BBT reported a 23% EBITDA margin in second quarter of 2015 (2Q15). BBT's broker insurance model no longer includes higher risk underwriting activities following the sale of American Coastal in 2Q15.
In August, BBT announced the planned acquisition of National Penn Bancshares, a Pennsylvania-based bank with close to \\$10 billion in assets. The acquisition further strengthens BBT's foothold in Pennsylvania, following the recent purchase of Susquehanna Bancshares (Susq), one of the larger bank deals announced over the past several years with \\$18.7 billion of assets. Although the National Penn transaction was not included in the 2015 CCAR capital plan, BBT will curtail planned share repurchase activity to offset any capital dilution related to the purchase, which is expected to close in the first half of next year (pending regulatory approval).
BBT is expected to remain an opportunistic acquirer of banks and nonbanking companies. In addition to Susq, BBT has also recently completed acquisitions of The Bank of Kentucky, with \\$2 billion in assets, as well as 41 branches from Citibank in Texas in 1Q15 and 21 branches in 2Q14. Given the heightened regulatory expectations and limited larger bank transactions that have occurred over the past few years, these regulatory approvals, as well as the approval for Susquehanna in particular given its size, is viewed favorably, and an affirmation of BBT's risk culture and framework. BBT has indicated publicly it plans to pause on further bank acquisitions for the next six to 12 months.
Fitch views BBT's capital position as appropriate, especially in light of the company's conservative risk profile. BBT's estimated Common Equity Tier 1 ratio under Basel III was 10.4% on a transitional basis at June 30, 2015, just slightly below peer averages. BBT has already begun planning to become an Advanced Approach (AA) bank given its asset size with projections of exceeding the \\$250 billion threshold over the near- to intermediate-term. In preparation for this, BBT already has roughly half of its securities classified as held-to-maturity, which would insulate regulatory capital from swings in interest rates when the company becomes an AA bank.
BBT received no objection to its capital plan under CCAR, and performed in line with peers under the regulatory stress testing. BBT was one of four large regional banks whose internal stress testing results were more onerous than the Federal Reserve's with an estimated Tier 1 common minimum ratio of 7.3%, as compared to the Fed's results of 8.1%. This may suggest BBT is applying the stress test macroeconomic variables to its balance sheet in a conservative manner.
The company's projected earnings under the severely adverse scenario were also the second highest of the large regional peer group, only after USB. The remainder of the banks all reported losses under the severely adverse scenario. BBT's relatively strong performance under DFAST is likely due in part to its insurance activities that are not materially impacted under the regulatory stress tests.
Asset quality has shown steady improvement over the past year. The decline was driven by a couple of loan sales, and continuing core credit improvement. BBT reported 33 basis points (bps) of net charge-offs (NCOs) in 2Q15, somewhat higher than the peer average (excluding COF) of 23bps, though still very low. Given the make-up of BBT's loan book, especially in its subprime automobile, credit card and other lending subsidiaries portfolios, it is expected to have somewhat higher loan losses than its peers. Fitch expects that loan losses will deteriorate for BBT, as well as the industry, from currently unsustainably low levels.
The company's strong liquidity position is due to its solid core funding base, which is derived from its extensive regional banking franchise that spans the Southeast and Mid-Atlantic. BBT has at least the top five market share in most of the markets in which it operates. BBT disclosed its estimated LCR at June 30, 2015 was 118%, well above the first requirement of 90% beginning Jan. 1, 2016.
Holding company liquidity is also strong, which Fitch deems important for BBT due to a higher balance of debt relative to other large regional peer banks. BBT maintained 28 months of cash at the parent as of June 30, 2015 for debt service, preferred dividends, upcoming maturities, and unfunded external commitments. This is well above the company's internal target of 12 months coverage.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
BBT's subordinated debt is notched one level below its VR of 'a+' for loss severity. BBT's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The uninsured deposit ratings of Branch Banking & Trust Company are rated one notch higher than BBT's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
HOLDING COMPANY
BBT's IDR and VR are equalized with those of its bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiary. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.
SUPPORT RATING AND SUPPORT RATING FLOOR
BBT has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, BBT is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
With a long-term IDR of 'A+', BBT remains one of the highest rated banks in the world. There is currently a low likelihood that BBT's ratings would be upgraded over the near term. Upwards ratings migration would be predicated on a superior earnings profile relative to peers, and the maintenance of capital at appropriate levels.
Fitch notes however that upwards ratings may be constrained by its opportunistic acquisition strategy. In terms of future bank M&A, BBT will likely focus on banks either in-footprint to enable cost savings or in contiguous markets. BBT will also continue to consider acquisitions of insurance agencies, a core competency of the bank, or specialized lending businesses, which are relatively high yielding and very efficient businesses for BBT. While BBT has proven track record with regard to acquisitions, M&A still present execution risk for the company.
Fitch will evaluate any acquisition on its merits. However, a sizable acquisition that adds incremental risk and leverage to the company could have negative rating implications. BBT has indicated the opportunity set for bank acquisitions rests more in the \\$5 billion to \\$20 billion asset size. If BBT were to execute a large transaction, Fitch expects the company would take steps to restore its capital position should it move forward with a sizable transaction. Absent that, ratings could be adversely impacted. Likewise, a poorly integrated acquisition could be a negative rating driver.
BBT's ratings could also move lower should credit quality deteriorate substantially or if the company becomes a more aggressive capital manager. Fitch views a downgrade as a low likelihood given the conservative risk appetite and consistency in performance. Downgrade scenarios would be predicated on BBT converging to peer averages across the board, and not adequately distinguishing itself from its peer group.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for BBT and its operating companies' subordinated debt and preferred stock are sensitive to any change to BBT's VR.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The long- and short-term deposit ratings are sensitive to any change to BBT's long- and short-term IDR.
HOLDING COMPANY
Should BBT's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the bank.
SUPPORT RATING AND SUPPORT RATING FLOOR
Since BBT's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
BB&T Corporation
--Long-term Issuer Default Rating (IDR) at 'A+'; Outlook Stable;
--Short-term IDR at 'F1';
--Viability at 'a+';
--Senior debt at 'A+';
--Subordinated debt at 'A';
--Short-term debt at 'F1';
--Preferred stock at 'BBB-';
--Support at '5';
--Support Floor at 'NF'.
Branch Banking & Trust Company
--Long-term IDR at 'A+'; Outlook Stable;
--Short-term IDR at 'F1';
--Viability at 'a+';
--Senior debt at 'A+';
--Subordinated debt at 'A';
--Short-term debt at 'F1';
--Long-term deposits at 'AA-';
--Short-term deposit at 'F1+';
--Support at '5';
--Support Floor at 'NF'.
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