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Huntington (HBAN) Rides on Balance Sheet Growth Amid Cost Woes (Revised)

Huntington Bancshares’ HBAN solid loan and deposit balances are expected to drive organic growth. Also, net interest income (NII) and margins are anticipated to rise in the near term. However, the company is witnessing higher expenses. Also, a lack of diversification in the loan portfolio and declining mortgage banking income due to higher mortgage rates are concerning.

While other banks witnessed a decline in deposits in the first quarter due to regional bank failures, Huntington’s deposit balances increased during the same period, indicating strength in this funding source. Moreover, the company’s lending book has also witnessed robust growth in the past few years supported by resilient commercial and consumer loan portfolios. Going forward, a rise in deposits will help HBAN be active on the lending front and strengthen its balance sheet. In fact, for 2023, management expects average loans to grow 5-7%.

Given the solid loan demand and expectations of interest rates remaining high in the near term, Huntington’s NII is expected to increase and propel top-line growth. The company projects 2023 NII (excluding Paycheck Protection Program and Purchase Accounting Accretion) growth of 6-9%.

Organic growth aside, Huntington has been undertaking strategic acquisitions in a bid to expand its footprint and capabilities in a number of verticals. In June 2022, it completed the acquisition of Capstone Partners, an Investment Banking firm, enhancing the complementary capabilities of the capital markets business. In May 2022, the company acquired Torana to enhance its digital capabilities and enterprise payments strategy.

With credit metrics gradually improving since the last quarter of 2009, we see HBAN as a proven astute manager of its credit quality historically. In first-quarter 2023, total non-performing assets were $578 million, down from $708 million in the prior-year quarter. With decent credit quality and reserves, the company is well-positioned to manage through any economic uncertainty.

As of Mar 31, 2023, cash and due from banks as well as interest-bearing deposits of $10.57 billion, was less than its long-term debt of $13.07 billion. Nonetheless, the company’s largest source of liquidity is core deposits, a source of stable and lower-cost funding. Core deposits totaled $140.4 billion as of Mar 31, and comprised 97% of total deposits. Given the decent liquidity and earnings strength, the company appears well-placed to meet its debt obligations in the long term.

However, Huntington’s rising cost base limits its bottom-line growth. Non-interest expenses have been increasing over the past few years due to continued investments in key growth initiatives. The rising trend is likely to continue in the near term, with management projecting the metric to increase 1-3% in 2023.

As mortgage rates are expected to remain high in the near future, origination volumes and refinancing activities are less likely to witness growth. This is expected to reduce Huntington’s mortgage banking income and fee income in the near term.

The majority of Huntington’s loan portfolio (57% as of Mar 31, 2023) comprises total commercial loans, depicting a lack of diversification. This can be risky for the company amid any unfavorable developments in the economy and competitive markets.

Shares of this Zacks Rank #3 (Hold) company have lost 30.7% compared with a 30.8% decline recorded by the industry over the past six months.

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You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bank Stocks Worth Considering

A couple of better-ranked stocks from the banking space are Mitsubishi UFJ Financial Group, Inc. MUFG and Pathward Financial Inc. CASH, each currently carrying a Zacks Rank #2 (Buy).

Earnings estimates for MUFG have been revised 1.3% upward for fiscal 2023 over the past 60 days. The company’s shares have gained 21.6% over the past six months.    

The consensus estimate for CASH’s fiscal 2023 earnings has been revised 1.8% upward over the past 30 days. Over the past six months, the company’s share price has increased 6.1 %.

(We are reissuing this article to correct a mistake. The original article, issued on May 23, 2023, should no longer be relied upon.)

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