Insurance commissions are driving fee income growth at BB&T Corporation (BBT) and net interest margin is stabilizing, according to Daryl N. Bible, Chief Financial Officer of BB&T. He was speaking at the BancAnalysts Association of Boston’s 33rd annual fall conference, held at the Langham Hotel.
Bible said that the Winston-Salem, North Carolina-based bank expects insurance commission organic growth rate of 4% to 6% in 2015. BB&T offers insurance for retail commercial, employee benefits, personal, title, underwriting, MGA, life, MGU and wholesale brokerage. BB&T is the fifth-largest distributor of insurance products in the United States.
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However, its net interest margin for 3Q 2014 declined 5 bps versus 2Q 2014, attributed by Bible to lower yields on new loans and runoff of covered assets. Bible said the 4Q 2014 is expected to decline 3% to 5% bbs mainly due to covered asset runoff and changes in forecasted loan balances and yields. 4Q 2014 net interest income is expected to decline slightly versus 3Q 2014. But asset sensitivity improved slightly due to loan and deposit mix changes.
Excluding residential mortgages, BB&T loans grew at an 8.8% annualized rate versus 2Q 2014, with 6.3% growth in total commercial and 12.7% growth in direct retail, Bible said. But average total loan growth for the 4Q 2014 is expected to be down an annualized 1% to 2% due to a management decision to sell all conforming loans. Excluding mortgage loans, average loans at BB&T are expected to be up 1% to 2%.
BB&T added volume in deposits through a Texas branch acquisition from Citibank in June 2014. The acquisition included 41 branches, $2.3 billion of deposits and $87 million in loans in the Dallas, Houston, Midland and Odessa markets. The company has also added $1.8 billion in assets by acquiring the Bank of Kentucky, according to Bible.
The new surge in deposits will see BB&T focus on growing fully banked, transaction relationships and on delivering enhanced products, Bible said.
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Robert Q. Reilly, CFO of PNC Financial Service Group Inc (PNC), said the company is focusing on under-penetrated markets and growing its fee income businesses as goals for the long term. He was speaking at the 33rd annual BancAnalysts Association of Boston Conference at the Langham Hotel.
PNC is a top 10 U.S. bank, with deposits of $226 billion and assets of $334 billion, making it the seventh-largest wealth manager in the country, according to rankings compiled by SNL DataSource. The company has a footprint that covers nearly half of the U.S. population, and its focus going forward is on growing its Southeast and Midwest assets to match its legacy locations in the Northeast.
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“PNC is focused on the things we can manage,” said Reilly. He cited growing loans that reflect the bank’s risk appetite and controlling expenses as keys to that strategy, adding that PNC’s year-to-date performance is in line with expectations. The company reports second quarter to third quarter revenue growth of 1%, with noninterest income growth of 3%. The Q3 noninterest income is 45% of the total revenue, Reilly said.
The PNC strategic priorities include increasing client investment assets and deepening relationships with those clients, Reilly said. The total client assets at the bank are now $302 billion, up 9% year over year from September 30, 2013, he added.
PNC has been revamping its retail banking model, using less physical space and more technology at its locations. Reilly said 200 branches will be converted to its new retail banking model by the end of the year.
Reilly mentioned the Southeast as a particular area of growth opportunity. The company acquired the territory when it purchased RBC Bank USA two and a half years ago. “We now have 6000 employees in the market,” said Reilly, noting brand awareness is up in the new region. Southeast sales have a 20%-plus CAGR from 2012 to 2014, while Midwest sales have 8%-plus CAGR from 2009-2014, Reilly said.
To expand its fee-based businesses, PNC is seeking to grow its customers, deepen relationships with existing clients and generate new relationships, Reilly said. It is already providing noninterest income in consumer services, corporate services, residential mortgages, service charges on deposits and asset management.
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Wells Fargo & Co (WFC) is seeing strong growth in its Wealth, Brokerage & Retirement division, which now accounts for 17% of company revenue and 9% of earnings, according to David Carroll, the Senior EVP of Wealth, Brokerage & Retirement at Wells Fargo. He was speaking at the 33rd annual BancAnalysts Association of Boston conference at the Langham Hotel.
The 17% revenue share is derived from trust and investment fees, accounting for 74%, and net interest income, 22%, Carroll said. The 4% remainder comes from miscellaneous revenue sources that were not broken out. WBR net income is up 34.1% from 2009-2013, while total revenue is up 5.2% over the same period.
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The WBR division offers retail brokerage services; wealth management for affluent and high-net-worth clients; comprehensive wealth management for ultra-high-net-worth families and individuals, foundation and endowments; and institutional retirement and trust services, including 401(k) and pension plan record-keeping.
“We’re all here to help our customers succeed financially,” said Carroll, who added that the goal is applied to “every product we sell, every service we offer” through the company’s businesses.
Carroll emphasized what he termed “long-term sustainable advantages” in Wells Fargo growth, as the company seeks to leverage its 6,615 retail banking outlets and 1,380 Wells Fargo Advisors serving 3.2 million households. Carroll claimed that Wells Fargo growth can be sustained without regard to economic conditions, thanks to its best practices and multiple businesses.
Wells Fargo reported third quarter earnings of $5.7 billion and EPS of $1.02, both up 3% year over year. Its period-end loans were up $29.7 billion, or 4% year over year, with period-end deposits up $88.8 billion, up 9% year over year. The company reports an ROA of 1.40% and ROE of 13.10%.
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DuPont Fabros Technology, Inc. (DFT) is a potential candidate for combination according to David Toti, a REIT Analyst at Cantor Fitzgerald. Toti says DuPont Fabros would be a good fit for a number of other companies because of its high-quality portfolio.
Toti says data center landlords, like DuPont Fabros, have been the choppiest segment of the REIT space in recent years, partly because of a real change in fundamentals, rapid maturation of the industry, as well as moving parts in technology and supply/demand balances.
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“We moved to a more positive position on the group in October of last year; we have since pulled back a little bit on our total weighting, given strong price recovery,” Toti says.
Toti says he likes DuPont Fabros because it is discounted relative to his team’s estimate of underlying portfolio value. “We like the wholesale data center suppliers in today’s environment, versus the retail/colo end of the spectrum, as we view this to be more defensible in the long term,” he says.
Cantor Fitzgerald Analyst David Toti says CubeSmart (CUBE), a self-storage company, is one of the stocks he likes at the moment. He says he sees upside for the stock given the likely impact of portfolio transformation activities over the last several years.
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“They have sold weak assets, acquired some big portfolios, and that rotation has really changed their growth profile, which the market has not fully priced yet,” Toti says. “We think that their same-store metrics and their core performance metrics should improve in the next couple of quarters, which will be a positive catalyst for the stock.”
David Brain, CEO of EPR Properties (EPR), says the company will likely begin looking at new investment categories over the next couple of years. Currently, EPR Properties focuses on investing in entertainment, recreation and education.
“We continue to tell the market we’re interested to grow not only the three, what we often call, investment-focus areas but possibly add an additional one,” Brain says. “We’d do that by virtue of our five-star investment criteria we often reference in our presentation materials.”
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Brain says that he and his team plan to continue the momentum of recent growth. He says the company has a solid balance sheet and will remain “shareholder-centric” while pursuing new opportunities for growth.
He says EPR Properties is “not growing for growth’s sake but growing for shareholder results, continue to build the leading position of the company in these three areas of investment and continue to look for opportunities for new areas of investment. That’s really the job of management and the thesis for the next several years. We’ve got it going very well; we’re going to keep it going and add to the recipe as opportunities present themselves.”
William Bayless, CEO of American Campus Communities, Inc. (ACC), says the company has communicated to the market that, for the fall of 2015 and 2016 collectively, its development pipeline is $437 million. He says the company has been focused on keeping its balance sheet in a position that allows it to pursue opportunities as they arise.
“Since achieving that investment-grade rating, we’ve been successful in raising corporate bond debt,” Bayless says. “In 2013, we did a $400 million offering at an all-in coupon of 3.75%, and in June of this year, we did another $400 million offering at about 4.125%.”
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Now that American Campus Communities has reached a scale of $7 billion, Bayless says management is very focused on the accretive recycling of its own capital. This fall, the company has already delivered about $260 million in development, he says.
“Typically, we are looking to dispose of $150 million to $250 million in assets annually so that we can organically fund our growth program,” Bayless says.
W.P. Carey Inc (WPC) CEO Trevor Bond says that at the beginning of the year, the company’s earnings guidance assumed acquisitions for its owned portfolio of approximately $200 million. But, when the company reported Q2 earnings, management increased that number to about $500 million to $600 million.
“That reflects a strong growth in our anticipated acquisition pipeline,” Bond says. “We tend to be cautious about making our announcements too soon, but I think we feel reasonably confident that we can hit those numbers.”
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Bond says part of the increase in the owned portfolio is attributable to opportunities in Europe, where he says the buying opportunities are less competitive than in the United States.
“For a comparable tenant quality and real estate quality, we’re finding that the cap rates are higher in Europe than in the United States, if you compare properties and tenants pound for pound,” Bond says. “At the same time, the debt market there is at a different point in its cycle. The cost of 10-year debt at the company level, for instance, if we were to do a Eurobond offering, is significantly less than in the U.S.”
Bond says the advantage for W.P. Carey as a borrower in euros is that the company has strong euro revenues from its owned portfolio.
“We can match those revenues against debt service in euros, and that’s a good hedge while we’re still taking advantage of the lower rates,” he says.
Tom Mitchell, Senior Analyst at Miller Tabak + Co., says Home Properties, Inc. (HME) remains one of his strongest recommendations. He says the stock is trading at a very large discount to other apartment REITs, but that the company’s underlying metrics and performance over the last several years has been outstanding.
“We think that sooner or later, one way or another, the market gap will close, either because someone decides to make a bid for them or because people recognize that the underlying value of this entity is considerably greater than where it’s been trading,” Mitchell says.
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Mitchell says Home Properties is fairly tightly configured. He says more than 90% of its funds from operations comes from the corridor between Virginia and Boston. However, the company has a major presence in Washington D.C., which Mitchell says is a negative. He believes there is a reason that Home Properties trades at a discount.
“The reason is that the properties that they own, which are apartment complexes, are by and large slightly lower rent,” he says. “They’re more in the C and B category than the A category, but the dollar amount of rent people pay is not necessarily an indicator of the quality of the underlying cash flows, and we think that they have at least equal quality of cash flows with the luxury rental, high-end REITs.”
