HBANP - Huntington Bancshares: The Pain Continues

2023-10-20 12:03:38 ET

Summary

• Huntington Bancshares Incorporated reported Q3 earnings with flat revenues but surpassed consensus by $70 million.
• Loans and total deposits experience healthy growth, contributing to the bank's promising outlook.
• Despite concerns about margins, Huntington Bancshares remains highly efficient and has strong asset quality.
• A juicy yield awaits income investors.

We continue our Q3 coverage with longtime regional darling Huntington Bancshares Incorporated (HBAN). Despite everything that is happening in the macro environment, HBAN has been resilient operationally as it continues to show growth. However, like so many of the stocks in the banking space, the surge in rates has led to immense concern among investors. The Street continues to bid these stocks down on margin concerns and concern over future loan demand. Our coverage has sought to assess trends in these key metrics.

Today, we look at the bank's just reported Q3 earnings . Despite some macro headwinds and the possibility of a mild recession, so far our Q3 earnings analyses of the regional banks indicate that the industry has still not shown real signs of decreasing loan demand, while earnings have been pressured due to lowered margins, but we see margins troughing out in the next quarter or so. Moreover, Huntington is still a very highly efficient bank, and asset quality is strong. Let us discuss the bank, which now offers a bountiful 6.4% yield while you wait.

Headline performance

With the just reported Q3 , Huntington Bancshares saw its top line flatten out from last year. In the quarter, the bank reported revenues of $1.89 billion, a notable pretty much flat year-over-year increase, but surpassed consensus by $70 million. The thing is many banks are seeing an uptick in loan loss provisions, ahead of concerns of borrower ability to repay loans. Still, the company saw earnings surpass estimates. The bank reported a Q2 net income of $547 million, though that was down 4% from last year. Earnings per share hit $0.36, adjusted, beating estimates by $0.04, and edging up from Q2.

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. Average total deposits increased $2.6 billion, or 2%, from the prior quarter and $2.1 billion, or 1%, from the year-ago quarter. That is welcomed, given the immense competition among banks. Loan balances continue to grow year-over-year as well. Total loans were up $3.8 billion, or 3%, from the year-ago quarter, though they did take a breather from Q2. This is all reflected in share prices, as we have fallen back to the $9 range.

Why the pressure on earnings? It is all about those margins since the cost of funds has increased dramatically. What is interesting here is that net interest income actually increased $22 million, or 2%, from the prior quarter, but is down $36 million, or 3%, from the year-ago quarter. However, it is starting to lend evidence to our theory that margins will approach a trough in the sector as we move ahead. This theory rests on rate hikes being at their end. If more hikes occur, we will see erosion on loan demand and higher costs of funds on deposits. However, there are enough signs in our opinion that the Fed can wait and see.

Quality metrics

This may be a monster-sized regional bank, but the bank has a relatively conservative lending approach and strict underwriting standards which have contributed to this positive trend in credit quality. Net charge-offs were 0.24% of average total loans and leases for the quarter, and management noted that this is below the cycle target range, though it did tick up from Q2. We continue to watch this key metric. Nonperforming assets had declined for 8 consecutive quarters but saw their first tick up in Q3. The allowance for credit losses was $2.4 billion, or 1.96%, of total loans and leases at quarter end, while the nonperforming assets to total assets was 0.52%.

Despite some of the concerns, we do note that the efficiency ratio, which is a crucial metric we monitor for all regional banks, remains very strong. The bank's efficiency ratio hit 53.9%, the best it has been in years. That is impressive folks. We anticipate this metric will remain well under 60%. We also note that the efficiency ratio improved from 54.0% last quarter and 56.3% a year ago.

While the macro situation is certainly ominous, and the prices of the stocks of banks are reflecting this, the economy still is holding up. Shares have been bid down ahead of a recession now. That is clear. But things get darkest before dawn as they say.

Value

From a valuation perspective, Huntington Bancshares Incorporated's share price at $9.70 remains relatively attractive based on the metrics we follow. We have a compelling dividend yield of over 6.3%, outperforming bond yields. Trading at 7.5X forward earnings and 1.2X tangible book value, which is pretty attractive.

Final thoughts

There is no way to sugarcoat the macro environment, but we see the setup for Huntington Bancshares Incorporated margins to start to expand going forward as long as rate hikes are done. The surge in 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. We see margins troughing out. Loan demand remains the next question mark, but quality metrics suggest a highly efficient bank that is not overly burdened by the possibility of loan losses. We think traders will do well investing here. We liked Huntington Bancshares Incorporated at $11, and really like adding here under $10.

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