EUR 850.00 For Business Accounts Only

Morningstar | Steady Results for Huntington in 2Q; Loan Growth Continues to Be Strong. See Updated Analyst Note from 25 Jul 2018

Huntington Bancshares reported second-quarter results that were largely in line with our long-term thesis. Due primarily to the time value of money, we are increasing our fair value estimate to $16 per share from $15. The bank generally raised full-year guidance, which was at least partially expected, given the tailwind from interest rates, although we were impressed by the raise for loan growth as well. Results remained strong for Huntington, as the return on tangible common equity exceeded 17% yet again, coming in at 17.6% for the quarter, while the return on average assets was 1.36%. For a bank that was consistently in the low teens for years before 2017, these are tremendous results. As we have already projected, the new Huntington continues to exceed management’s long-term ROTCE goal of 13%-15%, and we believe this is sustainable.

Earnings per share were up 30% year over year, at $0.30, and noninterest expense stayed low, down 6% year over year. The efficiency ratio is already sub-60%, coming in at 57% for the quarter. Perhaps the biggest highlight for us was the loan growth and management’s comment about the momentum it is seeing in its Midwest footprint.

Average commercial and industrial loans were up just 3% year over year (which wasn’t bad compared to many competitors), but they were up 2% quarter over quarter, or roughly 8% annualized. Average residential mortgage balances, a key area the bank is pushing for growth, was up 5% quarter over quarter, and RV and marine finance were up 7% over the same period. Management said it is seeing continued optimism among commercial clients from tax reform and no effects yet from trade issues and related tariffs; it expects increased capital expenditures for the remainder of the year. Management also upped its average loan growth guidance, narrowing the overall range and increasing the maximum it expects by 50 basis points. We have seen mixed indicators and opinions about future loan growth, but a return of true investment in the commercial base would be a very positive indicator for the economy.

Credit remained pristine, with provisioning remaining range-bound, along with other key credit quality measures such as delinquency ratios, nonperforming asset ratios, and criticized asset ratios. The firm expects a few basis points of net interest margin expansion, which we had already projected, and we expect the majority of net interest income growth will be balance sheet driven. Noninterest income was up just 3.4% year over year, and mortgage banking income continues to be a drag for the industry and Huntington.

Huntington recently increased its quarterly dividend to $0.14 per share from $0.11. It also increased the amount of approved share buybacks over 200%, to just over $1 billion over the next four quarters. The bank said it plans to front-load the repurchases, completing roughly three fourths by end of 2018. We view the bank as advantaged with regards to improving returns on equity via returning excess capital to shareholders.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress test regulations, please see our July 8 report, "New Regulatory Proposals Will Change Stress Test Landscape."