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'Prudent' Bank Bets: BB&T and Wells Fargo

 November 13, 2012 02:10 PM
 


By John Buckingham, editor The Prudent Speculator

We are deploying more of our portfolio cash as the seasonally favorable six month period begins.

We are increasing our position in BB&T Corp. (BBT), a North Carolina-based financial services company with $182 billion in assets. We are also establishing a position in San Francisco-based Wells Fargo & Co. (WFC), which has $1.4 trillion in assets.

With a history dating back to the Civil War, BB&T Corp. ranks as one of the ten largest banks in the U.S. by deposits; it has 1,850 financial centers across 12 states.

We believe the more than 10% recent pullback in the share price following a Q3 earnings report that came in below analyst expectations provides another buying opportunity.

Despite the miss, BBT reported that net income in the quarter rose to $469 million ($0.66 per share), up from $366 million ($0.52) a year earlier. The bank benefited from a 71% spike in mortgage banking income to $211 million.

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BBT also continues to expand, announcing that it will open 30 new financial centers in Texas that will focus on commercial and small business lending.

The firm has seen 68% deposit growth in the Lone Star State since 2009. BBT shares currently trade at a reasonable 11 times forward earnings estimates and carry a dividend yield of 2.7%.

Founded in 1852, Wells Fargo is the second largest bank in the U.S. by deposits, and the largest by branches (over 9,000).

WFC serves one in three U.S. households, and offers a wide variety of financial products ranging from banking, investments and insurance to mortgages and commercial finance.

While the bank continued to suffer from the low interest rate environment, Wells' unique business model (which leads us to think of them as not simply a bank) helped the company turn in a solid Q3, posting earnings of $0.88 per share versus consensus estimates of $0.87.

We like that the firm has a good reputation with its customers, and has a solid and growing foothold in metro America and the heavily populated coastal regions.

WFC has good capital levels and appealing core earnings power, which could experience improved levels as credit quality increases and cost cutting takes hold. We also believe that interest rates will eventually rise, helping the company's all-important net interest margin.

WFC now trades for 10 times forward earnings estimates and offers those looking for mega-cap financial exposure a 2.6% dividend yield.
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