2023-04-26 09:00:00 ET
Summary
- HBAN looks a bit undervalued as shares are trading under book value, and its market cap is less than the total equity on the balance sheet.
- HBAN had a top and bottom line beat with Q1 earnings and showed growth in significant areas, including average deposits.
- Q1 earnings showed that HBAN is in a strong liquidity position, and the fear of bank runs didn't impact them during the Silicon Valley Bank fiasco.
- I think there is an opportunity for shares to rebound to around $15 while generating a strong yield.
Huntington Bancshares ( HBAN ) looks interesting after delivering a top and bottom-line Q1 earnings beat on the heels of the Silicon Valley Bank (SIVBQ) debacle. We may not be out of the woods yet, and it will take some time to understand the full ramifications of what has occurred and if there is lingering exposure in the banking sector. On 4/20/23, HBAN delivered $0.39 in EPS from $1.93 billion in revenue, a top-line beat of $30 million, and a bottom-line beat of $0.01 compared to the consensus estimates. For weeks, speculation about deposits moving from smaller banks to large money centers, and we are now seeing what occurred. The SIVB situation occurred in the first half of March, so there was more than enough time left in Q1 for depositors to move their funds if they were worried about liquidity issues at their incumbent bank. HBAN's average deposit balances increased 2.3% YoY and 0.3% QoQ to $146.1 billion. HBAN looks to have come out of Q1 with a strong liquidity position and recently declared a $0.155 quarterly dividend , in-line with Q4 of 2022. HBAN looks interesting as shares have sold off roughly -28.06% since the beginning of March , falling from $15.18 on 3/6/23 to just under $11. Today, HBAN trades under book value with a margin of safety in their LDR ratio. I wouldn't be surprised if shares can mount a rally to the $15 level.
HBAN's Q1 results should calm the market's fears as it showed they are well positioned through its diversified model.
For the banking industry as a whole, this earnings season is about each individual bank's strength and stability. The SIVB debacle shined a spotlight directly on the sector, and all eyes are looking toward which banks were negatively impacted. One of the fears was that businesses and individuals would pull their deposits at regional and thrift banks and consolidate into the large money centers, which would have caused severe ramifications throughout the banking sector. If this occurred, it could have left banks in illiquid positions with significantly larger loans on the books than deposits. A run on HBAN never occurred, and their average deposit balances grew 2.3% YoY and 0.3% QoQ. HBAN's total core customer deposits were the 2 nd largest they have been YoY, and total core commercial declined throughout the year but still came in 2.7% larger than Q1 of 2022.
HBAN is a multi-state diversified regional bank with over 150 years of servicing financial needs. HBAN provides full-service commercial and consumer deposit, lending, and other banking services. HBAN has 1,032 full-service branches and private client group offices primarily located in Ohio, Colorado, Illinois, Indiana, Kentucky, Michigan, Minnesota, Pennsylvania, West Virginia, and Wisconsin, with select financial services and other activities conducted in other states. HBAN has built a diversified financial institution that has maintained deposit growth with strong liquidity.
In Q1 of 2023 , HABN delivered $0.39 in EPS, which was an increase of $0.10 YoY. Net interest income increased $263 million, or 23% YoY, while 69% of total deposits were insured. HBAN's cash and cash equivalents and available contingent borrowing capacity of $61 billion represented 136% of uninsured deposits. HBAN's loan balances continued to grow, as total loans increased by $1.5 billion QoQ. HBAN's average loan balances increased 1.3% QoQ driven by commercial loans, which increased by $1.5 billion, or 2.2% QoQ.
One of the big things this earning season is liquidity. HBAN's 2 primary sources of liquidity, cash, and borrowing capacity at the FHLB and Federal Reserve, representing $10 billion and $51 billion at the end of Q1. As of 4/14, HBAN's total cash and available borrowing capacity increased to $65 billion, which represents a coverage ratio of 136% to total uninsured deposits. As average deposits increased, and HBAN's coverage of uninsured deposits remained strong, the concern around HBAN's balance sheet liquidity should have been answered.
HBAN generated $1.41 billion in NII, and $512 million in non-interest income in Q1. These are on the larger side of what has been produced since Q3 2020. Overall, HBAN drove $1.84 billion in total revenue and generated $602 million in net income throughout Q1. HBAN is showing the market that they are a dynamic financial institution that can be relied upon during periods of uncertainty, and the financial scare last month didn't impact its underlying businesses.
HBAN has a growing dividend that is well covered by its earnings
HBAN has a long history of paying dividends which goes back pre-1990. During the financial crisis, HBAN reduced its quarterly dividend from $0.27 to $0.01. The quarterly dividend remained at $0.01 from Q1 of 2009 thru Q2 of 2011. Since resuming their annual dividend increases, HBAN has provided shareholders with 12 consecutive dividend increases and brought the quarterly dividend back to $0.155.
Due to the recent decline in HBAN's share price, its dividend yield now exceeds 5.5%. HBAN's forward EPS is $1.43, and they pay an annual dividend of $0.62. Currently, HBAN's payout ratio is 43.36%, as the annual dividend is less than half of the EPS generated. This is important because it provides enough room for HBAN to continue with future annual dividend increases.
How HBAN looks compared to its peers
I am looking at HBAN compared to the following banks:
- TFS Financial Corporation ( TFSL )
- WSFS Financial Corporation ( WSFS )
- Columbia Financial ( CLBK )
- New York Community Bank ( NYCB )
- Citizens Financial Group ( CFG )
- KeyCorp ( KEY )
HBAN looks interesting from a P/E and P/B ratio. HBAN trades at a 7.64 P/E ratio, while the peer group trades at an average P/E of 14.86. HBAN also trades at a P/B of 0.97, while the peer group average is 1.13. Banks aren't exciting, but HBAN may deserve a bit of a premium as they trade under book value and at a mid-single-digit P/E.
The loan-to-deposit ratio, better known as the LDR ratio, is one that I use to get an understanding of a bank's liquidity snapshot. While there has always been a concern about overextending, the recent financial scare has put a greater emphasis on loans to deposits. HBAN trades at the 2 nd lowest LDR ratio at 0.81x. They have $119.94 billion in loans covered by $146.1 billion in deposits. HBAN has significant room between deposits and loans and, compared to their peers, seem to be in a strong liquidity position.
From a valuation standpoint, HBAN looks as if there may be some upside potential. HBAN has $18.81 billion in total equity on the books, placing its equity-to-market cap ratio at 118.72%. HBAN's equity is currently trading at a discount to its market cap, which could indicate there is room for appreciation. HBAN also trades at -2.84% of its book value. One could make an argument that HBAN is one of the regionals that should trade at a premium to book. The combination of the market cap and share price trading at a discount to book value and equity is an indication that there could be upside potential in shares of HBAN.
HBAN has a 5.66% yield which is just above the 5.42% peer group average. HBAN also has a payout ratio of 43.36% which is well below the 85.93% peer group average. HBAN has more than enough room to sustain its dividend and provide increases in the future.
Conclusion
As earnings season progresses, regional banks are reporting, and HBAN showed the market that the SIVB situation hadn't impacted them negatively. Deposits are strong, and HBAN is in a good liquidity position. I think that investors could generate a larger yield than CDs or T-bills while capturing a few dollars of upside potential with shares of HBAN. I don't think it's unreasonable for shares to get back to the $15 level, but I wouldn't expect much more than that in the near term. HBAN has shown that it is still a strong regional bank, and the current valuation looks interesting, and there is a nice dividend to go along with it.
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Huntington Bancshares Looks Interesting After A Q1 Beat And A Yield Of 5.66%