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Morningstar | Narrow-Moat Huntington Bancshares Delivers Solid Finish to 2018. See Updated Analyst Note from 24 Jan 2019

Narrow-moat-rated Huntington Bancshares reported fourth-quarter results that were largely in line with our long-term opinions on the company. After updating our model for the latest results, we are decreasing our fair value estimate to $15.00 from $15.50, largely due to slightly more conservative net interest margin and leverage assumptions. Full-year earnings per share grew 20% to $1.20 per share, reflecting the tailwind of rising interest rates in 2018. The full-year return on tangible equity grew 220 basis points to 18%, which is a marked improvement from pre-2016 results. While we are quite impressed with these returns, we expect the current positive tailwinds will subside in 2019 and Huntington will find further gains challenging. That being said, if Huntington can maintain the gains it has achieved, then it would still be one of the best-performing regional banks under our coverage.

We anticipate slowing improvement, or even flat levels for most of the metrics that we use to measure banks. The net interest margin, or NIM, grew three basis points to 3.33% for the year, due to asset sensitivity. We are forecasting that the bank will face increasing deposit costs, which along with purchase accounting accretion, will make further NIM expansion more difficult. The bank achieved 6% growth in average loans for full-year results, largely due to strong growth in mortgages, and RV and marine loans. We are impressed with management’s ability to penetrate the Midwestern market after its acquisition of FirstMerit, though we are forecasting that this excellent asset growth will slow as the company fills these markets.

Credit costs remain at or near all-time lows, which will eventually begin to normalize, however, we do recognize that 2019 may be another year of pristine credit conditions. Noninterest income grew 1% year over year, largely due to increases in trust services, payment processing, and capital market fees, while mortgage fees remain a headwind. We believe that Huntington’s relatively large product scope enables more cross-selling, higher margins, lower distribution costs, and higher switching costs. The bank’s high fee income combined with year-over-year noninterest expense declines drove the efficiency ratio down to about 58%, which is quite good within our regional bank coverage.