Investing in BB&T Corporation – What Investors Need to Know (Part 3 of 20)

(Continued from Part 2)

Interest is segment’s primary income source

BB&T’s Community Banking segment offers a variety of loan and deposit products and other financial services. Interest is the primary source of income for the banking business. It contributes more than 70% to the Community Banking segment’s revenue. Interest income is a function of spread between the lending and deposit borrowing rate as well as the growth in loans and deposits.

Interest rate environment affects interest income

The lending and borrowing rates depend on the interest rate environment. In an increasing rate environment, interest income produced by floating-rate loans increases. Banks raise the interest they charge for loans faster than what they pay on deposits. This boosts spread income.

A rate rise might also indicate an improving economy. This would result in higher demand for loans. More loans mean higher spread income for the bank. In contrast, interest income is negatively affected by the low interest rate environment.

Decreased net interest income

BB&T’s Community Banking segment’s net interest income for 2014 decreased compared to 2013. The decrease was primarily due to lower yields on new loans and lower spreads earned on deposits. However, loan growth has been supportive. This was observed across banks as a result of the continued low-rate environment.

The above graph shows the Community Banking segment’s net interest income, non-interest revenue, and net income over the last three years.

Other banks include SunTrust (STI) and Regions Financial (RF), and big banks like JPMorgan Chase (JPM). These companies experienced spread compression due to the interest rate environment. Combined, BB&T (BBT) and Regions Financial form ~3% of the SPDR S&P Bank ETF (KBE) and ~1.8% of the iShares U.S. Financial Services ETF (IYG).

Reduced expenses

The segment’s income from non-interest fees—like service charges on deposits and bankcard fees—grew. This was supported by improvements in efficiency. This resulted in lower personnel, occupancy and equipment, professional services, and regulatory expenses.

Another major contributor to reduced expenses was the decrease in the allocated provision for credit losses driven by lower charge-offs. While this trend was also observed across many banks, too much reduction in provisions might result in greater risks. Investors should carefully watch for changes in provisions going forward.

Overall, the Community Banking segment’s net income increased 3.6% in 2014—compared to 2013.