A month has gone by since the last earnings report for Huntington Bancshares (HBAN). Shares have added about 13.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Huntington Bancshares due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Huntington Q3 Earnings Beat Estimates, Expenses Rise
Huntington’s third-quarter 2020 earnings per share of 27 cents outpaced the Zacks Consensus Estimate of 25 cents on impressive top-line strength. The bottom-line figure, however, comes in 21% lower than the prior-year quarter reported tally.
Increase in revenues aided by high net interest and non-interest income drove the results. Notably, a rise in mortgage banking revenues and an increase in average earnings assets acted as driving factors. Further, improvement in loans and deposits was another positive.
However, results were adversely impacted by higher credit provisioning due to the bleak economic conditions. Moreover, elevated expenses were an undermining factor. Also, pressure on margin, due to low rates, was a major drag.
The company reported net income of $303 million for the quarter, which slipped 19% year over year.
Revenues Up, Expenses Escalate, Loans & Deposits Inch Up
Total revenues climbed 5% year over year to $1.25 billion in the third quarter. Additionally, the top-line figure surpassed the Zacks Consensus Estimate of $1.23 billion.
Net interest income (FTE basis) was $822 million, up 2% from the prior-year quarter. This upside resulted from an increase in average earnings assets, partly offset by a lower net interest margin (NIM). Further, net interest margin (NIM) contracted 24 basis points to 2.96%.
Non-interest income climbed 11% year over year to $430 million. This upswing mainly stemmed from an increase in almost all components of income, partly muted by lower capital market fees, service charges on deposit account, bank owned life insurance income and other non-interest income. Notably, mortgage banking income more than doubled.
Non-interest expenses rose 7% on a year-over-year basis to $712 million. This was chiefly due to higher personnel costs, outside data processing and other service costs, occupancy and equipment expenses, partly negated by lower professional services, amortization of intangibles, marketing, deposit and other insurance expense along with other costs.
Efficiency ratio was 56.1%, up from the prior-year quarter’s 54.7%. A rise in ratio indicates a fall in profitability.
As of Sep 30, 2020, average loans and leases at Huntington increased marginally on a sequential basis to $80.5 billion. Moreover, average total deposits increased 2% from the prior quarter to $95.1 billion.
Credit Quality Disappoints
Net charge-offs were $113 million or an annualized 0.56% of average total loans in the reported quarter, up from the $73 million or an annualized 0.39% recorded in the prior year. Furthermore, the quarter-end allowance for credit losses more than doubled to $1.88 billion.
Provision for credit losses went up significantly on a year-over year basis to $177 million on the coronavirus crisis. In addition, total non-performing assets totaled $602 million as of Sep 30, 2020, up 24.9%.
Common equity tier 1 risk-based capital ratio and regulatory Tier 1 risk-based capital ratio were 9.89% and 12.37%, respectively, compared with the 10.02% and 11.41% reported in the year-ago quarter.
Tangible common equity to tangible assets ratio was 7.27%, down from 8% as of Sep 30, 2019. Return on average assets and average common equity was 1.01% and 10.2%, respectively, compared with the 1.37% and 13.4% recorded in the prior-year quarter.
Revenues are expected to increase 3-3.5% from 2019. Notably, Q4 revenues are expected to be in line sequentially, but up 7-8% year over year.
Net interest income is likely to be up 1-2% on higher average earning assets, partially offset by NIM compression. The NIM for 2020 is likely to be around 300 basis points and in the fourth quarter, a flat to moderately higher NIM is anticipated, driven primarily by further reductions to the cost of interest-bearing deposits.
Fee income is anticipated to rise 8-10%, driven by robust mortgage banking income. The fourth-quarter outlook includes moderation in mortgage banking, an uptick in capital markets fees as well as several other fee lines.
Non-interest expenses are anticipated to be up 2-2.5% year over year. Continued investment in technology and strategic initiatives is expected, partially offset by benefit of expense management plan. Management expects to deliver positive operating leverage for the 8th consecutive year. Management expects Q4 to be up 3-5% sequentially.
Management expects average loans and leases to climb about 6% year over year. Commercial loan growth is expected to be driven largely by PPP for full year; expectation for 4Q20 stabilization and return to modest growth as utilization rates rebound. Consumer loan growth is likely to be aided by residential mortgage, indirect auto, and RV/marine; continuation of these trends expected in 4Q20.
Average total deposits are expected to jump around 10%. Management projects double digit commercial deposit growth and mid???single digit consumer deposit growth, reflecting government stimulus, increased consumer and business banking production, and reduced attrition. Also, elevated deposit levels are likely to remain for several quarters.
A challenging economic environment is likely to unfavorably impact asset quality. Net charge-offs are expected to be 50-55 bps, affected by the oil & gas portfolio.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 9.09% due to these changes.
At this time, Huntington Bancshares has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Huntington Bancshares has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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