BB&T takes aims at Wachova deposits

BB&T Corp. fired a shot across the bow of Wells Fargo & Co.‘s plans for Wachovia Corp. by targeting Wachovia deposits in the Southeast.

Analysts say that BB&T could be the main beneficiary of Wachovia’s recent collapse and the subsequent takeover by Wells Fargo. They said that Wells Fargo is an unfamiliar bank in the majority of markets in which BB&T and Wachovia compete.

John Allison, the chairman and chief executive of BB&T, said in a conference call with analysts that “we’ve gained at least $1.2 billion in deposits from Wachovia and probably more, and continue to move Wachovia clients to BB&T today.“

BB&T also reported a 19.4 percent decrease in net income to $358 million in the third quarter, compared with the same quarter a year ago. Analysts said that the decline was not unexpected given the current banking environment.

The bank had diluted earnings of 65 cents a share. The average forecast of analysts surveyed by Zacks Investment Research was 66 cents. BB&T shares rose $1.10 yesterday to close at $33.26.

What BB&T is competing for, and what Wells Fargo wants to retain, is the $448 billion in Wachovia deposits. The battleground states likely will be North Carolina, South Carolina and Virginia.

Analysts have said that customer run-off from Wachovia could range from 5 percent, or $22.4 billion, up to 20 percent, or $89.6 billion. A lawsuit filed recently by Citigroup said that Wachovia lost at least $5 billion in deposits before regulators brokered an ill-fated deal between the banks.

“While we would have preferred Citigroup to buy Wachovia, because it would have been a little easier to compete against, we’re quite ready to compete with Wells,“ Allison said. “Wells is certainly a well-run company, and we have a very high regard for them.
“However, Wells has no brand equity in our core markets. The typical midsized small business and retail clients are not familiar with Wells,“ he said. Allison said that BB&T has “extremely strong brand equity” in markets in which it competes heavily with Wachovia.

Red Gillen, a senior analyst with Celent, said that BB&T’s “greatest potential threat” against Wells Fargo is attracting the deposits of small companies with between 20 and 200 employees.

“Consumers are unlikely to unravel their banking relationships with the Wells-owned Wachovia simply due to the hassle factor,“ Gillen said. “Large companies are probably going to be attracted by Wells’ expertise and capital.

“However, small businesses are more demanding in terms of local, personalized, hand-holding service, without the sophisticated requirements of a medium- or large-sized company. This kind of service is exactly what BB&T provides.“

When asked whether BB&T would consider cutting its dividend, as other such competitors as Wachovia have done to reduce costs, Allison said that the bank evaluates the dividend every month.

“To our retail shareholders, the dividend is very important,“ Allison said. “Many of them live on it. It’s a part of their lives. They typically focus more on the dividend than the share price.

“We’ve seen that in contrast with what Wachovia did” and the effect it has had in Winston-Salem. Wachovia had cut its dividend from 64 cents in February to 5 cents in July.

“It appears that Wachovia has violated a trust with its clients and its shareholders that is hard to repair,“ Allison said. “But as long as we’re in a strong capital position, and as our forward projections show we can continue to pay the dividend, we want to do that.“
Analysts and investors were anxious to review BB&T’s third-quarter results considering that the bank, along with Wells Fargo, has drawn praise for its strength and stability. The bank raised its loan-loss provision in the quarter to $364 million, up from $105 million in the third quarter of 2007.

BB&T said that the increase in its loan-loss provision, along with increases in net charge-offs and nonperforming assets, were driven largely by continuing challenges in residential real-estate markets, particularly in Georgia, Florida and the District of Columbia.

Scott Valentin, an analyst with FBR Capital Markets, said he would have preferred that BB&T raise its loan-loss provision even higher to “build reserves further in front of what we expect to be a significant increase in problem commercial real-estate and commercial and industrial loans.“

BB&T has to perform “at the best of its ability for several more quarters, better than its peers,“ said Michael Nix, who manages shares of financial-services companies for Greenwood Capital Associates LLC of Greenwood, S.C. “If it does not, its stock could be punished.“

Allison said that BB&T has grown and prospered in other challenging economic times. “I believe we will not only navigate the current challenges, but will be even more successful in the future,“ he said.

Richard Craver writes for the Winston-Salem Journal.