As a US$14b market capitalisation bank, Huntington Bancshares Incorporated (NASDAQ:HBAN) is well-positioned to benefit from the improving credit quality as a result of post-GFC recovery. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk Huntington Bancshares takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
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What Is An Appropriate Level Of Risk?
If Huntington Bancshares does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. Since bad loans make up a relatively small 0.50% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Does Huntington Bancshares Understand Its Own Risks?
Huntington Bancshares’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 205.68%, Huntington Bancshares excessively over-provisioned by 105.68% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
Is There Enough Safe Form Of Borrowing?
Huntington Bancshares profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Huntington Bancshares’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Huntington Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
HBAN’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for HBAN. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for HBAN’s future growth? Take a look at our free research report of analyst consensus for HBAN’s outlook.
- Valuation: What is HBAN worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether HBAN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.