HBANP - Huntington Bancshares: A Rough Q4 Is This The Bottom In Performance?

2024-01-19 14:17:45 ET

Summary

• Huntington Bancshares' Q4 revenues declined 12.7% YoY, but earnings were in line with expectations.
• Loans and total deposits are growing, with average total loans and leases increasing by $445 million from the previous quarter.
• Asset quality metrics weakened, and efficiency worsened dramatically in Q4.

We continue our Q4 regional bank coverage with Huntington Bancshares Incorporated ( HBAN ). There remain macro concerns and pressure on net interest margins, while bank asset quality so far in the banks we follow has been mixed. However, HBAN shares have rebounded here off the recent October lows, and we still view this name as one to consider for income. We now revisit the bank's just-reported Q4 earnings .

Despite some macro headwinds and the possibility of a mild recession, so far our Q4 earnings analyses of the regional banks indicate that the industry has still not shown real signs of decreasing loan demand, while earnings continue to be pressured due to lowered margins, but we have predicted that in the current rate environment that we see margins at or near a bottom. Efficiency has slipped, quality metrics have weakened, and noninterest income is under pressure. Let us discuss the bank, which still offers a juicy 5% yield while you wait for more stabilization.

Headline Performance

In Q4 , Huntington Bancshares saw its top line flatten out from last year. In the quarter, the bank reported revenues of $1.72 billion, a decline of 12.7% year-over-year, and missed consensus by $40 million. Still, the company saw earnings in line with expectations. The bank reported a Q4 net income of $243 million, down nearly half from Q3, and down sizably from $645 million a year ago. Adjusted earnings per common share were $0.27, excluding $0.12 per common share of after-tax Items, down from $0.43 a year ago.

Both loans and total deposits are experiencing healthy growth. One of the key indicators of a strong bank is its ability to grow loans and deposits, and Huntington continues to enjoy growth. Average total deposits increased $1.5 billion, or 1%, from the prior quarter and $4.0 billion, or 3%, from the year-ago quarter. Growth in loans is key as they are at higher rates now, helping margins, while growth in deposits helps with liquidity for future investment. Loan balances continue to grow year-over-year as well. Average total loans and leases increased $445 million from the prior third quarter to $121.2 billion, and increased $2.3 billion, or 2%, from the year-ago quarter.

So, why are we seeing such dramatic declines in earnings with loan and deposit growth? First, non-interest fee type income has taken it on the chin with lower mortgage demand. Then, it is all about those margins since the cost of funds has increased dramatically. And net interest income and margins took a hit. Net interest income decreased $52 million, or 4%, from the prior quarter, and decreased $146 million, or 10%, from the year-ago quarter. Since it appears rate hikes are done, we think margins do stabilize, but they fell here to 3.07% from 3.20% in Q3, and down from 3.54% a year ago.

Quality Metrics Were Mixed

As we have seen with other regional banks, asset quality metrics were mixed. Net charge-offs were 0.31% of average total loans and leases for the quarter, rising again, from 0.24% in Q3. We continue to watch this key metric, and it is moving in the wrong direction. Nonperforming assets had declined for 8 consecutive quarters but saw their first tick up in Q3, but in Q4, they ticked back up. The allowance for credit losses was $2.4 billion, or 1.97%, of total loans and leases at quarter end, while the nonperforming assets to total assets rose from 0.52% in Q3 to 0.58% in Q4.

Efficiency has always been strong here, but it worsened dramatically in Q4. The bank's efficiency ratio hit 77.0%, a stark contrast from 53.9%, the best it had been in years. In short, a tough quarter overall. We have anticipated this metric would remain well under 60%, but it is too soon to say if this is a one-off or the start of something more precarious.

Valuation

From a valuation perspective, Huntington Bancshares Incorporated's share price at $12.15 still remains relatively attractive based on the metrics we follow. We have a compelling dividend yield of over 5%, outperforming bond yields. HBAN is trading at 9X forward earnings and 1.46 tangible book value, which is pretty attractive, but not as strong as we have seen in the past.

Final Thoughts

First, we think rate hikes are all done. That is consensus, and we agree. The surge in the cost of funds is topping off, while future loans will be at higher yields and take the average yields on interest-earning assets higher as we move forward. This should help margins. We think margins are bottoming. The lack of efficiency is a problem short term and stems from declining net interest income and the lack of non-interest income. At this point, we rate Huntington Bancshares Incorporated stock a hold.

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