I bought Huntington Bancshares stock during the pandemic as a recovery play, as I believed it was one of the best Midwest regional banks.
Despite challenges in the banking sector, HBAN reported solid earnings and improvements in return on tangible common equity.
Positive trends in deposits and loans, along with a proactive approach to managing expenses, set the stage for accelerated growth beyond 2024.
Introduction
It's time to discuss my only bank holding. As some of my readers may know, I bought Huntington Bancshares ( HBAN ) during the pandemic in 2020 when it was part of a bigger research project I was working on for a private client.
Back then, we were looking for pandemic recovery plays. We bought Huntington Bancshares because of its massive footprint in the Midwest and its role as one of the biggest banks for pandemic loan distributions, like the PPP program.
Fast forward, even after HBAN had rallied, I decided to keep my shares as I liked the bank as an income vehicle. The only change I made is that I shifted the stock from my dividend portfolio into my trading account, as contradicting as that may sound.
That was based on one major thing: I decided to eventually sell the bank.
This decision is based on the poor long-term risk/reward, as banks tend to sell off hard during recessions. I believe banks are great recovery tools during recessions - not necessarily great long-term income growth stocks.
Over the past ten years, HBAN has outperformed its regional banking ( KRE ) peers by roughly 30 points. However, due to weakness in 2020 and the 2023 banking crisis, it has underperformed the S&P 500 by a huge margin.
As I'm not looking to sell any of my dividend portfolio holdings, I placed the bank into my trading portfolio instead of keeping it in my dividend portfolio.
With all of this said, I believe that after the 2023 banking sell-off, HBAN shares are undervalued, which is why I'm looking to sell them close to $18.
I also highlighted this in a recent article written on December 18. That was my most recent article on the bank titled Huntington Bancshares Is Up To 40% Undervalued, As I See A Path To $18."
Hence, in this article, I will update my thesis using the company's just-released quarterly numbers.
Especially given market and economic uncertainty, I believe it is key to re-assess the situation, which confirms my thesis that there's room for HBAN to rise.
So, let's dive into the details, as there's a lot to discuss!
Strength Amid Headwinds
I usually do not care for every single earnings release. However, especially int his environment, I believe it is important to stay on top of new developments.
For example, in a just-released article covering the earnings of HBAN's peer, KeyCorp ( KEY ), I highlighted comments from the Wall Street Journal about challenges in the banking industry.
[...] the banks collectively charged off $6.6 billion in loans in the fourth quarter, double the amount from the previous year . Loan losses, particularly in the commercial real estate sector, posed challenges.
It also doesn't help that headlines like the one below are surfacing at an increasing pace, which indicates that loan quality will be an even bigger issue in 2024 than in 2023 .
Wall Street Journal
[...] Nonetheless, while acknowledging rising loan losses, bank executives remained confident in consumer strength , attributing it to a robust labor market.
During earnings calls, wage gains surpassing inflation and strong average deposit balances per customer were highlighted. However, signs of strain emerged as consumers faced higher interest rates and depleted pandemic savings , which I expect to worsen in 2024 unless the Fed manages to achieve a "soft landing."
With that said, in the fourth quarter, HBAN reported GAAP earnings per common share of $0.15, while adjusted EPS stood at $0.27. According to Seeking Alpha , these numbers are in line with expectations.
However, as we can see below, notable items, mainly related to the FDIC special assessment and the termination of the pay-fixed swaption hedging program, had a significant impact on earnings per share, reducing it by $0.12 and $0.04 per common share, respectively.
Huntington Bancshares
The good news is that the return on tangible common equity ("ROTCE"), which serves as a key metric for evaluating the efficiency of the company's capital utilization, came in at 8.4%. When adjusted for notable items, it significantly improved to 15.1%.
Moreover, one major fear last year was the health of deposits. When banks started to go bankrupt, banks feared that it could lead to a widespread bank run.
In the fourth quarter, deposits increased by $1.5 billion, which translates to a 1% growth rate.
Second, we outperformed on both deposits and loans throughout the year. Our colleagues are acquiring new customers and deepening our existing customer relationships. Importantly, we delivered this growth, while effectively managing our deposit beta. - HBAN 4Q23 Earnings Call
Huntington Bancshares
When it comes to loans, average loan balances increased by 2% quarter-over-quarter, signaling a positive trend. A breakdown of commercial loans reveals growth in distribution finance and auto floorplan, while commercial real estate balances declined.
This was no surprise but the result of strategic optimization towards higher returns in commercial lending, aligning with the company's capital allocation priorities in this somewhat challenging environment.
Huntington Bancshares
With regard to interest rate changes, net interest income for the quarter decreased by $52 million or 3.8% to $1.327 billion.
The net interest margin declined sequentially to 3.07%, influenced by a lower spread net of free funds, reduced FHLB stock dividends, and hedging impacts.
Cumulatively over the cycle, we have benefited from our asset sensitivity and the expansion of margins with net interest revenues growing at an 8% CAGR over the past two years. - HBAN 4Q23 Earnings Call
Huntington Bancshares
Moreover, going forward, the company expects to benefit from rate-repricing, even if overall yields remain a headwind.
Even as the forward curve forecast lower short-term rates, many of our fixed-rate loan portfolios retained substantial upside repricing opportunity for some time to come. We forecast approximately $13 billion to $15 billion of fixed-rate loan repricing opportunity in 2024, with an estimated yield benefit of approximately 350 basis points. - HBAN 4Q23 Earnings Call
Huntington Bancshares
The company also maintained robust contingent and available liquidity at $93 billion, representing 206% of total uninsured deposits.
The capital position remained strong, with reported common equity Tier 1 at 10.3%, reflecting a sequential increase for the fifth consecutive quarter.
The adjusted CET1 ratio, inclusive of AOCI, rose by 58 basis points to 8.6%.
Now, the company's focus is on driving the adjusted CET1 ratio into the target operating range of 9% to 10%.
Huntington Bancshares
In light of these developments, it is also key to assess credit quality, which is one of my favorite things to look at when analyzing banks.
As we can see below, credit quality continued to perform well, with net charge-offs at 31 basis points for the quarter. Although this is up from just 0.03% in 2Q22, the numbers of the past two years were heavily skewed by the pandemic.
Although an increase in charge-offs makes sense, given the pressure on the economy, this is nothing more than a normalization. We see the same when looking at credit loss allowances and the criticized asset ratio.
Huntington Bancshares
During its earnings call, the company also provided a detailed outlook for 2024, including expectations of accelerated loan growth between 3% and 5%, solid deposit trends with growth between 2% and 4%, and a net interest income ranging between down 2% and up 2%.
This is what the bank said with regard to the Fed's potential rate path (emphasis added):
If the higher for longer rate scenario plays out and loan growth tracks to the top-end of our range, we expect net interest income to grow by approximately 2% .
If the lower scenario comes to fruition and loan growth tracks to the lower end of our growth range, we could see spread revenue declining 2 percentage points .
In both scenarios , I expect net interest income to trough in the first quarter before expanding throughout 2024 from that level. - HBAN 4Q23 Earnings Call
Huntington is also taking a more proactive approach to managing core expenses, with expectations of a 4.5% increase and a tax rate of approximately 19% for the full year.
Huntington Bancshares
Furthermore, the anticipation of continued GDP growth and the avoidance of a hard landing provide a favorable context for the bank's accelerated growth strategy.
Importantly, the bank commits to maintaining its aggregate moderate-to-low risk appetite while delivering this accelerated growth throughout 2024 and beyond.
So far, a "soft landing" seems to be the base case. If it were to encounter weaker economic growth, the bank would obviously have to adjust its outlook.
However, it's currently a bit too early to make that case - at least for 2024.
Where's The Shareholder Value?
One benefit of owning HBAN is its dividend. The company currently pays $0.155 per share per quarter, which translates to a yield of 4.9%.
This dividend is protected by a 51% 2024E earnings payout ratio.
The five-year dividend CAGR is 4.4%, which is mainly a result of the pandemic and very careful dividend growth since then.
With that said, analysts seem to agree with the company.
Using the data in the chart below:
2024 is expected to see a 2% EPS contraction, followed by a potential recovery with 11% growth in 2025 and 6% growth in 2026.
If the Fed is able to keep the economy from entering a recession while gradually lowering rates, HBAN could grow even faster, especially on the deposits side, if it has less competition from high-yield, risk-free alternatives.
FAST Graphs
Furthermore, HBAN is trading at a blended P/E ratio of just 10.3x. Its normalized ratio is 13.6x, which is represented by the blue line in the chart above.
A return to that valuation by incorporation of its dividend and expected earnings growth trajectory could pave the road for 18% annual returns and a fair price target of $19.
Although I am a bit more bearish than the average analyst, given my expectations of a "harder" landing, I believe HBAN is trading below its fair value, which is why I am looking to unload my position close to $18.
Also, given how well HBAN managed headwinds - in addition to its valuation - I'm sticking to a Buy rating.
However, please be aware that regional banks are regional. If you're a conservative dividend growth investor, odds are HBAN may not be right for you.
Takeaway
Despite challenges in the banking sector, HBAN remains robust.
The bank reported solid earnings, with notable improvements in return on tangible common equity and a strong focus on maintaining liquidity.
Positive trends in deposits and loans, coupled with a proactive approach to managing expenses, set the stage for accelerated growth in 2024.
The dividend, a key attraction for investors, remains secure, providing a 4.9% yield.
Hence, I maintain a Buy rating, considering the potential for 18% annual returns and a fair price target of $19.
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