Huntington Bancshares Incorporated (NASDAQ:HBAN) is a U.S. regional bank with a large market share in the Midwest region. The bank has shown growth over the past few quarters, and has been able to maintain a robust capital base. Despite a record low interest rate environment, the bank has been able to increase its interest rate margin. Going forward, the strong demand in C&I loans in the Midwest region will benefit Huntington the most in the third quarter. Therefore, we recommend our investors to long the stock.
Huntington Bancshares, headquartered in Ohio, has over a hundred years of experience in serving the diversified financial needs of its customers, largely in the Midwest region of the U.S. The bank has no significant presence outside the U.S. For the purpose of reporting, the bank has classified its operations into the following four business segments; Retail and Business Banking, Regional and Commercial, Automobile Finance and Commercial Real Estate and Wealth Advisors, Government Finance, and Home Lending. During the first half of the current year, the bank relied heavily on income from its Automobile Finance and Commercial Real Estate and Wealth Advisors segment. Approximately 41% of the income came from this segment, followed by Retail and Business Banking segment at 19%. The remaining three segments constitute around 13% each in the bank's bottom line.
The table above demonstrates how the bank has been able to surprise the Street over the past 5 quarters. Huntington Bancshares has been able to post better-than-expected results. The bank's average earnings surprise for each of the 5 most recent quarters remains 10%, while revenues surpassed expectations by around 1% on average. Revenues surprise in the most recent quarter was in line with the average surprise; however, the bottom line exceeded its expectations by around 9%.
Most Recent Quarter's Performance
The bank reported net interest income of $434.7 million, which was 3% above what it generated during the prior quarter. The increase in net interest income was a result of both increases in the average interest earning assets and an increase in the net interest margin. Despite the prolonged low interest rate environment, the bank was able to marginally increase its net interest margin from 3.4% to 3.42%. Much of the 2 basis point increase in the net interest margin came as a result of a decrease in interest expense, which was in turn caused by a 7% increase in average noninterest bearing deposits.
Where interest income witnessed a surge, non-interest income for the same quarter plunged 11% as compared to the linked quarter. A $22.6 million decrease in gain on sale of loans was largely associated to the decrease in non-interest income. As the benefits of net mortgage servicing rights decreased by $6.8 million, the income accruing from mortgage banking also declined, contributing to the decrease in non-interest income.
During the second quarter of the current year, the bank managed its non-interest expense efficiently. Non-interest expense decreased by 4% as compared to the previous quarter.
During the second quarter of the current year, the bank was able to post a bottom line of $152.7 million, as compared to $153.3 million in the quarter linked.
The bank has a robust capital base as compared to most of its peers in the U.S. Regional Banking Industry. At the end of the second quarter, the bank maintained a Tier 1 capital ratio of 11.93% and a Tier 1 common capital of 10.08%. This is compared to the 9.3% Tier 1 common capital ratio for PNC Financial (NYSE:PNC).
In a report, Credit Suisse upgraded the bank's outlook to outperform. In the optimistic report to its investors, Credit Suisse predicts improvements in results on strong loan growth and successful expense management. Demand for Commercial and Industrial loans has remained strong in the Midwest region. The bank's strong footprint in the region enables it to benefit the most from the strong demand in commercial and industrial loans.
The stock of Huntington trades at a premium of 17% to its book value, as compared to a 10% premium for Fifth Third Bancorp (NASDAQ:FITB). FITB also has a large presence in the Midwest region. Huntington is currently trading at $7.19, while analysts have a bullish price target of $8.5. This is an upside of around 18%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.