Huntington Bancshares Needs To Get A Grip

| About: Huntington Bancshares (HBAN)

Summary

HBAN has pulled back 20% since I called for profit taking when the stock was well over $11.

Q2 earnings are out and I discuss the critical metrics that you need to be aware of.

Needs to get a grip on expenses to improve efficiency.

Where is the catalyst?

You know, the regional banks are potential monster stocks to own, if they can just get some momentum as a sector with a real catalyst being rising interest rates going forward. The one reality that I like about these stocks is that many of them get little coverage, yet are much easier to examine than their larger, major multinational banks. For these banks' it comes down to the key metrics, such as their loan and deposit growth, as these metrics are often simply more associated with the performance of their underlying stock versus their larger counterparts. One of the names I have liked for some time is Huntington Bancshares Incorporated (NASDAQ:HBAN), but it has been in neutral-to-down mode since I called for profit taking at $11 plus. So what now?

Well, as you may have seen, the company just announced its Q2 2016 results this morning. This quarter was more of the same, although it was not really weak by any stretch. It was just boring. It wasn't a fantastic quarter, but was solid overall. Some of the data were strong and some metrics I would like to have seen perform better. Not really much happening here, but that is generally a negative for a stock, unless it is a high dividend payer. The company reported a slight top line beat and a bottom line result that met analyst expectations. Huntington reported net income of $175 million, an 11% decrease from Q2 2015, which was simply weak. Earnings per share came in at $0.19 for Q2 2016, down 17% from the year-ago quarter. Revenues were higher year-over-year at $787 million, up 1%. That said, revenues beat estimates coming in $10 million ahead of consensus.

Of course, we would love to see top and bottom line beats, and hate to see misses, but the headline numbers only tell part of the story. We need to dig deeper. In addition to hoping to see growing revenues and earnings per share out of the bank, which we aren't seeing here, a regional bank's total loans and deposits are critical. These are metrics that you simply must pay attention to. This is what I really look for in regional banks. The bank saw a $2.7 billion, or 5%, increase in average deposits year-over-year. Further, loans were up $4 billion versus Q2 2015, or up 8%. Much of this was driven by a 26% increase in auto loans as well as commercial loans. This is strong growth, and increasing loans and deposits is a key indicator when I examine any regional bank. With these numbers, I am pleased with the bank at least in this respect.

As many of you know, I always look for improvement in the efficiency ratio. The strongest banks have an efficiency ratio under 60%, with the ideal being around 50%. Well, coming into the quarter, the company had an efficiency ratio of 64.6%. Here in Q2 2016, it worsened once again to 66.1%. This was a real negative for me and sours any positives in the quarter.

Overall, I think this report is pretty boring. There is just not much happening which makes me want to buy the stock here even though it is down 20% from where I called for a sell. I want to call a buy point again to make some money in this stock, but the reality is that there is simply nothing happening here. I was pleased particularly with the loan and deposit growth demonstrated by the company, but it didn't translate successfully to revenues/earnings, and so the efficiency ratio took a hit. The company "needs to get a grip" on expenses going forward in order to improve its efficiency. Simple as that. It is not all bad. Let's not forget the shareholder friendly nature of the company, paying a strong dividend and previously having a buyback. That dividend is set to rise in Q4 2016 as well. But the company needs to show me something before I will tell you to keep buying. I think it's attractively priced, but there is no pending catalyst to propel shares higher at this time, and that includes the pending FirstMerit purchase.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.