HBAN - Huntington Bancshares: Evaluating Its Available Preferred Stocks

2023-10-23 09:00:00 ET

Summary

• Seeking Alpha analysts have given positive ratings to Huntington Bancshares, sparking renewed interest in the bank and especially its preferred stocks.
• Along with a brief review of HBAN, this article explores three preferred stocks offered by Huntington Bancshares.
• HBANP offers buyers a Yield-on-Cost of almost 7.7%.  Of the three, this preferred also gives investors the most control regarding being Called.  For those reasons, it deserves a Buy Rating.

Introduction

I first become aware of Huntington Bancshares (HBAN) during the market meltdown after COVID hit, especially among banks. At the time, I was writing Cash Secured Puts, or CSPs, and the premiums on regional banks were astounding. Another strategy I have is building a fixed income ladder using a combination of baby bonds and preferred stocks. With several of my bonds maturing in 2024, I am always on the lookout for replacements to add to my current set of holdings which goes out to 2029, not counting the preferreds that do not mature, but could be Called.

Since the end of June, five different Seeking Alpha Analysts have covered HBAN, resulting in four Buy ratings and one Strong Buy rating. This reignited my interest in this bank and led to my seeing that it had several preferreds worth exploring. This article reviews what I learned about those issues, which are:

• Huntington Bancshares Incorporated 6.875% DEP PFD J ( HBANL )
• Huntington Bancshares Incorporated 5.7% DP SH PFD I ( HBANM )
• Huntington Bancshares Incorporated 4.500% DEP PFD H ( HBANP )

A brief overview of Huntington Bancshares

Seeking Alpha describes this bank as:

Huntington Bancshares Incorporated operates as the bank holding company for The Huntington National Bank that provides commercial, consumer, and mortgage banking services in the United States. The company operates through four segments: Consumer and Business Banking; Commercial Banking; Vehicle Finance; and Regional Banking and The Huntington Private Client Group (RBHPCG). Huntington Bancshares Incorporated was founded in 1866 and is headquartered in Columbus, Ohio.

Source: seekingalpha.com HBAN

This is how the bank describes itself.

HBAN has over 1200 branches, even after doing some consolation as the use of digital banking increases. HBAN operates primarily in the Midwest: 459 in Ohio, 290 in Michigan, 80 in Minnesota, 51 in Pennsylvania, 45 in Indiana, 35 in Illinois, 32 in Colorado, 29 in West Virginia, 16 in Wisconsin and 10 in Kentucky. Recent financial highlights include:

The statements indicate how HBAN has recovered from the negative effects on the banking industry. I think these three data items are important when evaluation preferreds.

All point to wide coverage currently for preferred holders. For more about the potential of Huntington Bancshares as an investment itself and its ability to service its preferred stocks, I suggest the strong Buy rating article: Huntington Bancshares: 5 Reasons This Regional Bank Is A Strong Buy .

Comparing the HBAN preferreds

Having the highest coupon has benefited those who bought the newest preferred, HBANL, which was issued last winter.

This preferred was originally issued by Chemical Financial Corporation , which then merged into TCF Financial Corporation , which then merged into HBAN. The coupon remained the same each time.

HBANL will reset on the first Call date to 2.704% + the rate on the 5-year UST Note and will then reset every five years. If reset today, the new coupon would be around 7.3%.

Common features for all three preferreds are:

• Rated Baa3/BB- about this time last year.
• Eligible for the 15% tax rate on distributions.
• Dividends are non-cumulative, typical of a bank.
• None have a maturity date.

Notice how much more HBAN had to "pay" to issue HBANL early in 2023 compared to HBANP issued after COVID but before the FOMC started increasing rates: 237.5bps more! That probably explains why they chose to do a reset-rate preferred versus a fixed-rate one, even though I suspect that also added to the coupon value.

Portfolio strategy

Before discussing strategies around the preferred stocks, the common has an attractive yield of over 6% and it should be noted HBAN did not cut their payout due to COVID and has since raised the quarterly amount by 1/2cent. It would not take much price appreciation for HBAN common to outperform what income investors using the preferred might achieve.

Here is how I evaluate the three preferred stock choices:

HBANL : This issue provides the highest coupon and currently the best yield for new investors. The downside is that it has the highest coupon but is offset by having the longest Call protection. So the 10% YTC, if Called, lasts into early 2028. I say downside on the coupon as it means HBAN has more incentive to Call this issue over the other two.

HBANM : New investors get the lowest yield with this issue. While currently the only one in Callable status, it would make more sense for HBAN to open market buys then Call the issue with a price below $19. After 4/15/28, HBANM gains some Call protection as then HBANL would be Called first unless the 5Y UST rate is below 3%.

HBANP: With by far the lowest coupon at 4.5%, it will be the last and very unlikely to get Called, so I would not put much hope on earning the YTC. Basically, new buyers lock in a long-term YOC of almost 7.7%. Of the three, this one gives investors the most control in regards to being Called.

One thing I look at when analyzing preferreds and the strength of the issuer is recent activity in the preferred part on the securities market. Above, we saw that HBAN issued two new preferreds since 2021. They have also been able to retire three preferreds they issued and one acquired one. These took place between 2003 and 2021, with the last two just after they became Callable. A strong positive signal was given HBAN as both of those redeemed in 2021 had higher coupons (5.785%/6.25%) than the preferred issued earlier that year. Information on these preferreds, can be found here .

Final thought

While it appears we are not at the end of the rate increase cycle, the rate on 10-yr USTs peaked in early October, though whether that top holds is brought into question.

My point is buying when rates peak could be after prices for preferred stocks have bottomed. If you like the Yield-on-Cost and Call protection, do not worry too much about making the perfect trade.

IRS wash sale rule

One question raised often by readers is whether selling one preferred at a loss and buying another within the 30+/- day window could violate the IRS wash sale rule. From what readers have provided and my own research, the swap should be okay if the two issues have different features like coupon, coupon type, Call date, or maturity date if one exists. While it does not apply here, convertible preferred and a common stock swap could be questionable. As many sites state, ask your tax professional if in doubt. While the IRS has never provided a definition of the key term, " substantially identical security", IRS Publication 550 provides some examples.

For further details see: