Strong Risk / Reward For Huntington And Fifth Third

Includes: FITB, HBAN
by: Takeover Analyst

In general, regional banks have been overly inflated by takeover speculation and regulatory benefits. Huntington Bancshares (NASDAQ:HBAN) and Fifth Third Bancorp (NASDAQ:FITB) are two regional banks that are more of an exception, as they offer favorable risk/reward and signs of improving fundamentals. From rising ROE and CD repricing in Huntington to significantly beating expectations in Fifth Third, a buyout is unlikely, although plausible. I am instead anticipating that the firms acquire and increase scale by their own right, as loan growth improves.

From a multiples perspective, both banks trade slightly below the peer average. Fifth Third trades at a respective 10.3x and 8.4x past and forward earnings while offering a dividend yield of 2.7%. Huntington, on the other hand, trades at a respective 10.1x and 8.3x past and forward earnings while offering a more attractive dividend yield of 3.2%. Of the two, Huntington is also in a much better position to acquire, as net debt only stands at 58.6% of market value compared to more than market value for its competitor.

At the third quarter earnings call, Huntington's CEO, Steve Steinour, noted:

"We reported net income of $143.4 million or $0.16 a share, essentially flat with the second quarter. Nevertheless, third-quarter results represented good progress against our strategic plan designed to improve long-term profitability and shareholder returns despite significant headwinds from the operating and interest rate environment.

We're clearly focused on the long-term and the level of returns we generate for the ROAs of the company. This quarter's ROA was 1.05%. We were still able to bring a solid 13% return on tangible common equity even as we took several steps to continue to reduce risk in both the liquidity during the quarter marked by political and economic uncertainty. Our $240.7 million in pretax, pre-provision income was in line with last quarter."

The third quarter had $1.9B worth of repricing for CDs and set the stage for ROE to expand to around 9.7% by 2013. NIM will likely decline, but still remain better than anticipated. In addition, analysts are expecting that the firm will gain the Fed's approval for greater dividend yields and share repurchases, which will help mitigate risk and attract investor entry.

Consensus estimates for the firm's EPS are that it will grow by 215.8% to $0.60 and then by 1.7% and 8.2% more in the following two years. Assuming a multiple of 11.5x and a conservative 2012 EPS of $0.58, the rough intrinsic value of the stock is $6.67. This implies 32.6% upside and compares to only 10.9% downside, which arises from the assumption that the multiple declines to 8x and 2012 EPS turns out to be 8.2% below the consensus. Accordingly, Huntington is one of the few regional banks that I see attractive risk/reward in. The Street currently rates shares a "buy."

Although Fifth Third remains more challenged to low interest rates, I believe that its recent announcement to take Vantiv public at an IPO of $100M was well placed when MasterCard (NYSE:MA) and Visa (NYSE:V) are near their historical highs. During the third quarter, EPS of $0.40 crushed the consensus of $0.33, as assets repriced slower than liabilities and NIM rose to an impressive 3.65%. One of the reasons why Fifth Third is attractive to investors is its flexibility over liabilities and strong improvement to its PF Tier 1 common ratio (Basel III), which is now around 9.8%.

Consensus estimates for Fifth Third's EPS are that it will grow by 92.1% to $1.21 and then by 16.5% and 9.2% more in the following two years. Assuming a multiple of 11.5x and a conservative 2012 EPS of $1.37, the rough intrinsic value of the stock is $15.76. If the multiple were to decline to 8.5x and 2012 EPS turns out to be 5% below the consensus at $1.34, the stock would fall by only 3.5%. Given such little downside, the Street also rates shares a "buy."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.