Huntington Bancshares Inc. (NGS: HBAN). Huntington posted mixed results in the third quarter, with growth in mortgage banking and loan origination offset by higher credit reserves. HBAN continues to grow its presence in its Midwest service area, and has a strong balance sheet and a focus on shareholder returns.
HBAN is trading at 9.6-times. It is also facing pressure from a flatter yield curve and a low interest rate environment. The company has initiated a hedging program to help mitigate the impact of lower interest rates. It is also working to boost organic growth while maintaining a low- to moderate-risk lending profile.
The beta is 1.34.
On October 22, Huntington reported 3Q20 earnings of $0.27 per share, down 21% from the prior-year quarter. Revenues rose 5% to $1.125 billion.
Third-quarter net interest income rose 2% from the prior year. The increase reflected an 11% increase in average earning assets, offset by a 16-basis-point decrease in the net interest margin, which fell to 2.96%.
Noninterest income rose 15% due to continued record mortgage banking activity. Noninterest expense rose 11% from the prior year due in part to branch consolidations. The efficiency ratio rose to 56.1% from 54.7% a year earlier, reflecting higher expenses.
In September, the company announced plans to close 27 branches. It expects the closures to be completed in 1Q21.
HBAN is one of the largest SBA lenders, and has been able to seamlessly process Paycheck Protection loans. Through the first round of the PPP, the company made more than $6 billion in loans to approximately 37,000 small and medium-sized businesses.
EARNINGS & GROWTH ANALYSIS
We look for sluggish growth in consumer lending and a lower net interest margin to be offset by a solid mortgage lending pipeline. We expect a slight increase in noninterest expense due to higher compensation costs.
Credit quality will remain a headwind over the next few quarters as the full effects of the pandemic remain unknown. The allowance for loans losses rose to $1.8 billion, or 2.21% of total loans, in 3Q. Provisions for credit losses rose by $95 to $177 million, reflecting the potential for increased defaults due to the pandemic. Net charge-offs rose to $113 million (0.57% of total average loans) from $73 million.
We also expect capital markets income to face pressure given the lower rate environment and equity volatility.
FINANCIAL STRENGTH & DIVIDEND
The company’s tier 1 capital ratio was 9.89%, down from 10.02% a year earlier and within the 9%-10% target range set by management. Tangible book value was $8.43 per share as of September 30, 2020.
Huntington did not buy back any stock in 3Q20 and does not expect to make repurchases in the fourth quarter.
MANAGEMENT & RISKS
Huntington is most sensitive to economic and housing market conditions in the Midwest.
Based in Columbus, Ohio, Huntington is a regional bank providing a range of retail and commercial banking services, residential mortgage lending, and asset management services. The company has $114 billion in assets and over 800 branch offices in Ohio, Michigan, Pennsylvania, Indiana, Illinois, West Virginia and Kentucky.
HBAN trades at 9.6-times our 2021 EPS estimate, above the peer average. Regional bank stocks have fallen recently, reflecting concerns about increased loan loss provisions, declining net interest margins, and a continued low rate environment. In addition, we expect Huntington to face rising technology costs. The company could also see lower mortgage revenue due to slightly higher long-term interest rates, which could further pressure earnings in 2021.
On October 23, HOLD-rated HBAN closed at $10.47, up $0.09.