Huntington's (HBAN) Balance Sheet Strength Aids Amid Cost Woes
Huntington Bancshares’ HBAN solid loan and deposit balances are expected to drive organic growth. Also, net interest income (NII) and margins are anticipated to support financials in the near term. However, the company is witnessing higher expenses. A lack of diversification in the loan portfolio and declining mortgage banking income due to high mortgage rates are other concerns.
Huntington is one of the top 20 bank holding companies in the United States and it is focused on acquiring the industry's best deposit franchise. The company’s total deposits saw a four-year compounded annual growth rate (CAGR) of 21.6% in 2022, while total loans increased, witnessing a CAGR of 16.6%. The uptrend for both metrics continued in the first nine months of 2023. In 2024, the company anticipates sustaining deposit momentum with a continued focus on acquiring and deepening primary bank customer relationships.
Also, with subsequent rate hikes and current expectations of the Federal Reserve keeping interest rates high in the near term, Huntington’s NII and the yield on interest-earning assets are expected to witness decent growth. Notably, management expects to maintain modest asset sensitivity to support NIM and NII growth in a high-interest-rate scenario in 2024.
Huntington has expanded its footprint and capabilities in a number of verticals through acquisitions. In 2022, the company acquired Capstone Partners (which enhanced the complementary capabilities of the capital markets business) and Torana (to enhance digital capabilities and enterprise payments strategy). Such inorganic efforts will help the company gain significant market share and, thereby, enhance its profitability.
As of Sep 30, 2023, Huntington's liquidity, comprising cash and contingent borrowing capacity, was $91 billion. It had a total debt (comprising of long-term debt and short-term borrowings) of $13.5 billion during the same period. Hence, given the decent liquidity, the company is better suited to meet its debt obligations, going forward.
However, Huntington’s rising cost base keeps us apprehensive. Non-interest expenses saw a CAGR of 22.6% over the last three years (ended 2022). The rising trend continued in the first nine months of 2023. Long-term investments in key growth initiatives are likely to keep its expense base higher, denting bottom-line growth.
The performance of Huntington’s mortgage banking business continues to be dismal. Mortgage origination volume, and net origination and secondary marketing income declined in 2022 and in the first nine months of 2023. The primary reason for this weak performance is high mortgage rates, which weakened the demand for such loans and refinancing activities. As mortgage rates are expected to remain high in the near term, a similar trend in origination volumes and refinancing activities is likely to continue. Thus, Huntington’s mortgage banking income is expected to be hurt.
Huntington has significant exposure to commercial loans. As of Sep 30, 2023, the company’s exposure to these loan portfolios was 56% of the total loans. The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of these loan categories might deteriorate. Thus, a lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
HBAN’s shares have gained 3.5% in the past six months compared with the industry’s rise of 9.8%.
Image Source: Zacks Investment Research
The company currently has a Zacks Rank #5 (Strong Sell).
Stocks to Consider
A couple of better-ranked stocks from the banking space are First Citizens BancShares, Inc. FCNCA and Wells Fargo & Co WFC.
First Citizens BancShares currently carries a Zacks Rank #2 (Buy). Its earnings estimate for 2023 has been revised 3.7% upward over the past 30 days. In the past six months, FCNCA shares have improved 10.5%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimate for WFC has been revised 3.3% upward for 2023 over the past 30 days. Shares of WFC have rallied 3.3% in the past six months. WFC currently carries a Zacks Rank #2.
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Huntington Bancshares Incorporated (HBAN) : Free Stock Analysis Report
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