In a post Dodd-Frank world, banks face a tricky environment. If they are too large, they draw the wrath and ire of ever politician and regulator around for just about any action they take. If the bank makes a lot of loans the line becomes that they are irresponsible and engaged in predatory lending. If they tighten credit then everyone clamors about redlining, discrimination, and banks being unfair to consumers. On the other end of the spectrum, small banks face a rapidly changing market where low interest rates, high branch upkeep costs, and stringent regulatory requirements all make being profitable an on-going challenge. The ideal spot for banks then is in between these two groups - big enough to have real scale and a budget for online/mobile banking technology, but small enough to avoid the gaze of regulators looking to make an example. Huntington Bancshares (HBAN) fits this niche with ~700 offices spread across Florida, Kentucky, West Virginia, Indiana, Ohio, Michigan, and Pennsylvania.
The Columbus, OH-based bank is heavily concentrated in Ohio, Michigan, and Pennsylvania, all states that are doing well economically, and seem poised to continue to do well from a combination of rebounding manufacturing, and the positive effects of the shale gas revolution. At ~$9.30 a share today, the bank trades around 12X trailing-twelve month EPS, but I think this EPS rate will appreciate meaningfully over the next 12 months. First and foremost, any rise in interest rates will help Huntington. But even if rates don't rise much (or at all, which is a distinct possibility), the company has invested heavily in building out its branches and technology in recent years. Most of these investments should be coming to completion in the second half of this year, and the lowered non-interest expense, should help boost EPS ~10% going forward.
After galloping ahead early last year, Huntington, like many other banks has not moved a lot since last summer. Fears over lower fee income from a slowdown in refinancing, and lower fee-income guidance from management have hurt the stock substantially. Combined with a still slowly falling net interest margin, HBAN investors have been cautious. These clouds seem to be starting to part though. Loan growth of 5.9% annually looked better at last report (well above most comparable peers), and analysts have been raising earnings estimates fairly consistently over the last few months. The company's auto and commercial lending books have been particularly robust, while non-performing assets have remained reasonably low (though they crept up a bit in January when the firm reported Q4). Overall, with nonperforming loans below 1% of total loans, I think HBAN is doing a nice job of balancing credit quality and growth.
Huntington's ~$50B in deposits give it sufficient scale that the investments it is making in technology and branch build-outs are not overly onerous on earnings, but at the same time offer the bank real benefits in creating a better customer experience. These investment expenses once they cease in 2H should boost HBAN's EPS run-rate to around $0.77 a year. This should be enough to get the stock into the $10-11 price range later this year in my view. The key to the company repeating last year's massive price run-up though will be the net interest margin. In the most recent quarterly report, HBAN said that their net interest margin has fallen 6 bps sequentially. The bank needs to start seeing higher rates to reverse this trend, and power EPS dramatically higher. Right now a lot of the loans that are running off the books were made at substantially higher rates. When they run-off Huntington is faced with an unpleasant choice: make new loans at low rates, or leave the capital sitting unused.
This problem isn't unique to Huntington, but it is more acute at the company, than at many of its peers by my estimates. To that end, I think that over time, each 1% increase in interest rates should boost Huntington's EPS by perhaps $0.10-$0.20, and the share price by $1.50-$3.00. Off of a $0.70-$0.80 base and a $9.30 stock price, these figures are nothing to sneeze at of course. These rate increases are largely out of the managements control though. The good news of course is that Huntington is making money even at today's depressed rates, so shareholders are certainly not in any serious danger of the firm needing to do dilutive equity raises. And in the meantime, the company does pay a $0.20 annual dividend which helps keep shareholders patient.
Additionally, Huntington seems to be taking some self-help actions which should pay off down the road. Last October the company announced the ~$100mm acquisition of 22-branch Camco Financial (CAFI), and a December executive office reorganization should hopefully help to keep management focused on making smart choices that lead to greater shareholder value. If nothing else though, the shake-up is somewhat indicative that management is not resting on its laurels. Bolt-on acquisitions like the Camco deal also suggest to me that management still feels confident growing its geographic footprint and addressable market without having to worry about regulatory interference. These are both traits lacking in many banks these days. On that basis alone then, the stock is worth a look from investors.