HBAN - Huntington Bancshares: Income Stock Crushed This Year But Operationally Resilient

2023-07-24 12:49:14 ET

Summary

• We have traded Huntington Bancshares Incorporated numerous times.
• The stock has been crushed this year with regional bank weakness.
• Q2 earnings showed resiliency and growth in many key metrics.
• Credit quality remains strong for this efficient bank.
• Collect hefty income.

Huntington Bancshares Incorporated ( HBAN ) continues to show impressive growth, and we are revisiting this regional bank today as we launch coverage of Q2 bank earnings. Despite some macro headwinds and the possibility of a mild recession, our analysis of the regional banks indicates that the industry remains healthy. However, there are concerns about growing loan loss provisions, considering the economic challenges stemming from high inflation and efforts to combat it. Nonetheless, Huntington stands out as a highly efficient bank with robust asset quality metrics.

Let us discuss the performance of this stock, which offers a solid dividend, and enjoys strong credit quality.

Top line growth

With the just-reported Q2 earnings report, Huntington Bancshares has demonstrated continued growth in its top line. The company's focus on expanding loans has resulted in strong net interest income, allowing revenues to reach new highs. In the quarter, the bank reported revenues of $1.84 billion, a notable 5.1% year-over-year increase, in line with consensus estimates.

While many banks have been preparing for a potential economic downturn by increasing loan loss provisions, Huntington Bancshares managed to beat expectations on this metric. The spike in revenues, coupled with strong margins, led to significant year-over-year earnings growth. The bank reported a Q2 net income of $559 million, an increase from the previous year's $539 million. On a per-share basis, earnings reached $0.35, flat from a year ago.

Taking advantage of their strong quarter and capital priorities, Huntington Bancshares Incorporated has been in the middle of $1 billion share repurchase program. The bank's focus on growing its capital base and maintaining a strong reserve profile has been instrumental in its success. Additionally, both loans and total deposits are experiencing healthy growth, further contributing to the bank's promising outlook.

One of the key indicators of a strong bank is its ability to grow loans and deposits, and Huntington has demonstrated strength in this area. Total deposit growth from the year-ago quarter amounted to an impressive $2.6 billion.

Loan balances continue to grow as total loans increased by $900 million or 0.8% from the prior quarter.

Net interest income decreased by $61 million or 4.3% to $1,357 billion, driven by lower sequential net interest margin. On a year-over-year basis, net interest margins increased $90 million or 7.1%. Net interest margin was 3.17%. While yields on assets are higher than a year ago, the cost of funds has, of course, risen, and this has led to more evidence that banks have seen peak margins.

Quality metrics

With that all said, in light of possible recession in 2023, banks are taking measures to increase their provision for losses. However, for now, Huntington's asset quality continues to improve. The bank's conservative lending approach and strict underwriting standards have contributed to this positive trend in credit quality, Net charge-offs were 0.16% for the quarter. This was lower than last quarter by 3 basis points. On a year-over-year basis, charge-offs were up 13 basis points from the prior year's historic low level. Nonperforming assets declined from the previous quarter and have reduced for 8 consecutive quarters. Allowance for credit losses was a touch higher by 3 basis points to 1.93% of total loans. Still, this is solid, and we like the bank here.

Efficiency ratio is a crucial metric we monitor for all regional banks, and Huntington's performance in this area is impressive. The bank's efficiency ratio hit 55.9%, well below the textbook target level of 60%, highlighting its operational strength. We anticipate this metric will remain well under 60% in 2023, further bolstering the bank's position. The efficiency ratio improved from 57.3% last year.

Value

From a valuation perspective, Huntington Bancshares Incorporated's share price at $11.78 remains relatively attractive based on the metrics we follow. Additionally, the bank's stock offers a compelling dividend yield of over 5.2%, outperforming bond yields. Trading at 8.5X forward earnings and 1.0X book value, we like the value. While the stock is not as attractive as it was in the single digits with tangible book at about $7.33, shares are still down significantly from the start of the year.

Take home

Huntington Bancshares Incorporated has shown resilience and some growth in key metrics in its Q2 earnings report. With a solid dividend yield, and potential for continued growth, the stock looks good for some income, and shares can be purchased further if we see economic weakness for future capital returns. While economic uncertainty and potential loan losses pose challenges, Huntington's robust loans growth and strong net interest margin make it a promising addition to any portfolio. We recommend considering Huntington Bancshares Incorporated for its solid dividend yield and potential for stability and growth in the coming years.

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