Huntington Bancshares: Are We Back?

| About: Huntington Bancshares (HBAN)
This article is now exclusive for PRO subscribers.


I have told you that regional banks are potential monster stocks to own and HBAN is up big the last three months.

Does performance justify this action?

What I want to see from the bank.

I have told you that regional banks are potential monster stocks to own, if they could just get some momentum as a sector with a real catalyst being rising interest rates going forward. Well, the sector in the last three months has been on fire. 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 had dropped 20% after I called for profit taking at $11 plus. So what now?

Well the stock is back. In fact, in the last three months, it has skyrocketed to a 52-week high and is comfortably over $12. But why? There is hope for the future of the company. In addition, performance has been on point. What do I mean? Well the company just announced its Q3 2016 results and they were quite strong. The company reported a strong top line beat and a slight bottom line result that also beat analyst expectations.

Despite the beats, things are down year over year in some aspects. Huntington reported net income of $127 million, a 17% decrease from Q3 2015, which was due to expenses from the First-Merit acquisition. Earnings per share came in at $0.22 for Q3 2016, beating by a penny. Revenues were higher year over year at $787 million, up 1%. That said, revenues beat estimates coming in $80 million ahead of consensus.

Of course, we 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 $12.1 billion, or 22%, increase in average deposits year over year. Further, loans were up $11.7 billion versus Q2 2015, or up 24%. Of course, this was driven by the First-Merit acquisition. That said, these metrics were growing on their own anyway.

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 Q3 2016, it worsened once again to 75%. This was a real negative for me. However, it must be noted that this was in part due to expenditures from the acquisition.

Overall, I think this report is pretty strong even though the year-over-year comparisons are muddied by the acquisition of First-Merit. I was pleased particularly with the loan and deposit growth demonstrated by the company, independent of the purchase. Still, I would like to see the company improve on its efficiency. Simple as that. Shares have rebounded very nicely, and so even with a strong dividend, let this one pull back before buying.

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.