FirstMerit Acquisition Should Add Great Value For Huntington Bancshares

| About: Huntington Bancshares (HBAN)

Summary

Huntington Bancshares, one of the top banks in the Midwest has expanded over the past years with successful mergers & acquisitions.

The addition of new customers and dynamic markets, as a result of acquisition offers an exciting and a deeper pool to provide value proposition and expands relationships.

The bank’s strategic actions are expected to bring positive impact over the next couple of years.

Huntington Bancshares (NASDAQ:HBAN), one of the top banks in the Midwest has expanded over the past years with successful mergers & acquisitions. Huntington Bancshares posted better than expected financial results for third quarter 2016. The bank reported total revenue of $938 million in Q3, significantly higher than wall-street expectations. With a solid franchise in the Midwest, Huntington is highly focused in capitalizing the growth opportunities. The bank has been making persistent efforts for business expansion via strategic acquisition. The consistently rising expenses has dampened the Q3 quarterly results. The quarter witnessed a plummet of 17% yoy in net income, primarily attributed to elevated expenses and surge in provisions for credit losses. The solid fundamental performance signals a new era for Huntington due to the introduction of customer-centric strategies. Auto and mortgage lending has played a vital role in driving the organic loan growth during Q3, complemented by acquisition-related growth.

Huntington Bancshares Annual Stock performance

Source: Google Finance

Acquisition drives Inorganic Growth: Huntington Bancshares completed the acquisition of Akron, Ohio-based,FirstMerit Corp for $3.4 billion on 16 August 2016 to fortify its footprint in the Midwest. The addition of new customers and dynamic markets, as a result of acquisition offers an exciting and a deeper pool to provide value proposition and expands relationships. With solid fundamentals, the bank is better positioned for strong performance in the coming quarters. The addition of FirstMerit's sound balance sheet, solid credit performance, dynamic markets and valuable customer base offers an opportunity to achieve long-term financial goals. The bank's branch expansion gets intensified as FirstMerit acquisition added 304 branches. With branch conversion to be completed in Q1 2017 and expected branch divestiture in Q4 2016, the acquisition integration is proceeding according to plans. Huntington is poised to expand via acquisitions supported by strong liquidity position.

Solid Revenue Growth: Huntington's revenue for Q3 escalated 24% as against same quarter previous year. The net interest margin posted a remarkable jump of 26% yoy primarily due to the surge in average earnings assets and an improvement of 2 basis points in net interest margin to 3.18%. The substantial growth in organic loan coupled with the acquisition related growth propelled the performance during the quarter. In addition, the non-interest income for Q3 spiked 35% in comparison to third quarter previous year, mainly attributed to upsurge in mortgage banking income. The FirstMerit acquisition that was completed in August 2016 is expected to boost earnings performance in the coming years. Going forward, the total revenue is expected to climb 16-18% for the full year 2016, excluding significant items. However, the steep surge in expenses can hurt the bottom-line growth.

With the ideal efficiency ratio ranging around 50%, the strongest banks has efficiency ratio below 60%. The bank reported the worst efficiency ratio of 75% in Q3. However, the acquisition-related expenses climbed steeply which in turn added 17% to the efficiency ratio. Meanwhile, the bank is expected to attain the efficiency ratio of 56-59% in the long run.

Strong Loan Balances & High Credit Quality: With the addition of FirstMerit's loans & deposits, the balance sheet growth of Huntington marked persistent organic growth during third quarter. The loan growth remains solid with an acceleration in average loans & leases by 24% yoy in Q3, with 8% growth excluding FirstMerit. This was mainly led by significant surge in C&I (Consumer & Industrial) and automobile loans. The FirstMerit acquisition has added $26.8 billion of total assets, $21.2 billion of total deposits and $15.5 billion of total loans and leases. Huntington's management now plans to reduce its exposure to indirect auto loans, where the bank has marked an aggressive growth over the past year. The automobile loans has played a key role in the growth strategy of the bank. The credit performance of the bank in the Q3 reflects high credit quality with the company's commitment to maintain a moderate to low risk profile in the new term. The non-performing assets rose to 0.72%, touching the lowest level in past 2 years. The asset quality of Huntington is likely to stay at current levels with slight volatility. Moreover, the net charge-offs are expected to remain below 35-55 basis points in the long term.

Donald Trump's victory in Presidential election is expected to bring remarkable transformation in the U.S. economy. The new administration is poised to boost GDP growth, hike interest rates and increase inflation. The financial sector is expected to witness expansion in net interest margin, in case the rates rise faster than Fed has initially planned.

Ohio based Huntington Bancshares vital strengths lies in multiple areas such as robust cash flow from operations, spike in profit margin, significant growth in revenue and surge in stock price. The bank has been consistently putting efforts to stimulate not only loan and deposit balances but improving the asset quality. The bank's strategic actions are expected to bring positive impact over the next couple of years. However, mounting expenses, rising margin pressure and strict regulations can pose challenges.

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