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Morningstar | Strong 3Q for Huntington; Some One-Time Expenses Coming in 4Q. See Updated Analyst Note from 24 Oct 2018

Huntington Bancshares reported third-quarter results that were largely in line with our long-term thesis. After making some slight adjustments to our model, we are decreasing our fair value estimate to $15.50 per share from $16. The bank decreased full-year guidance slightly for revenue; however, this was entirely based on repositioning its securities portfolio, a move that will pay off in the form of higher yields and income in the future. Additionally, some branch-consolidation-related expenses will also push expenses up slightly higher by year-end. Return on tangible common equity remained strong for Huntington, coming in at 19% for the quarter, while return on average assets was 1.42%. For a bank that was consistently in the low teens for returns on tangible equity prior to 2017, these are tremendous results. As we have already projected, Huntington continues to exceed management’s long-term ROTCE goal of 13%-15%, which we believe is sustainable. The bank is now firing on all cylinders, and management has announced that it will be coming out with new financial targets and goals by year-end. We wouldn't expect massive increases in overall returns on tangible equity for Huntington from now on, but given that the bank is now entering some of the top quartiles of performance among our regionals, sustaining these types of returns would be excellent regardless.

Earnings per share increased by 43% year over year, coming in at $0.33, and noninterest expense stayed low, down 4% year over year. The efficiency ratio came in at 55.3% for the quarter, which is a top-tier number. Loan growth and overall momentum remained strong within the bank’s Midwest footprint. Average commercial and industrial loans were up 3% year over year, while average consumer loans were up 10%. The bank’s RV and marine finance growth, as well as its mortgage growth, remain outsize. This supports management’s original strategy with regard to the FirstMerit acquisition. Fee income was up 4% year over year, driven by strong growth within cards and payments, as well as trust and investment management. This is again an encouraging sign of the strength of the Huntington franchise. 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. Net interest income was up 5% year over year. We anticipate some moderate net interest margin expansion over the next several years as rates continue to rise, but we expect the majority of net interest income growth will be balance-sheet-driven from here on out.