Huntington Bancshares: Near-Term Catalysts May Be Limited

About: Huntington Bancshares Incorporated (HBAN)
by: Ploutos Investing

Huntington Bancshares is a regional bank holding company headquartered in Columbus, Ohio.

The bank operates in regions where economic and population growth rates are typically lower than many other parts of the U.S.

It may be challenging for Huntington Bancshares to maintain its net interest margin in the near term.

The company pays an attractive and growing 4.2%-yielding dividend.

Investment Thesis

Huntington Bancshares (HBAN) delivered a solid Q2 2019 with double-digit EPS growth. The bank has a strategic plan through customer experience improvements to grow its revenue in the long term. However, it may be challenging to maintain its net interest margin in the near term as there may be more rate cuts H2 2019 and 2020. Huntington Bancshares pays an attractive and growing dividend with a dividend yield of 4.2%. Given some of the headwinds that the bank are expected to face, we think investors may want to remain on the sidelines.

Data by YCharts

Recent Developments: Q2 2019 Highlights

Huntington Bancshares delivered a solid Q2 2019 with 6% growth in revenue and 10% growth in its EPS. As can be seen from the table below, its revenue increased to $1.19 billion thanks to healthy fee income growth. Its EPS increased to $0.33 per share thanks to stock repurchases and its efforts to contain its operating expenses.

Source: Q2 2019 Earnings Presentation

Earnings and Growth Outlook

Strategic plan should help grow its business in the long term

Huntington Bancshares has a strategic plan that was announced in 2018. The goal is to grow its business through improving customer experience. This strategy involves investments in digitization, data & analytics, and operating efficiency improvements. The company has achieved success in its digital strategy. Its digitally active customers have increased by 23% from April 2017 to April 2019. Similarly, its mobile customers have also increased from 1 million in April 2017 to 1.3 million in April 2019.

Source: Investor Presentation

We believe Huntington Bancshares' strategic plan is one of the primary drivers of its improvements in efficiency ratio and return on tangible common equity in the past few years (see charts below). We believe the company will be able to improve its efficiency ratio and ROTCE through its strategic plan.

Source: Investor Presentation

Net interest margin may be under pressure in the near term

Net interest income represents about 68% of Huntington Bancshares' total net income in Q2 2019. As can be seen from the chart below, its NII increased slightly by 4% year over year thanks to a 2 basis points increase in NIM and 3% increase in average earning assets. However, its NIM declined by 8 basis points sequentially. This resulted in a decline in its NII quarter over quarter. As can be seen from the chart, its NII declined to $819 million in Q2 2019 from $829 million in Q1 2019.

Source: Q2 2019 Earnings Presentation

Looking forward, Huntington Bancshares' NII growth rate may be under pressure in H2 2019 and 2020. The Federal Reserve has recently just cut its key interest rate by 25 basis points in late July. It appears that there will likely be more rate cuts in H2 2019 and in 2020 especially if the economic strength in the U.S. deteriorates. Therefore, we think its NIM will likely continue to decline. Hence, it may be challenging to grow its NII in this environment.

Slower growth prospects in its major markets

Huntington Bancshares' major markets are in Ohio, Pennsylvania, Illinois, Kentucky, Michigan, Indiana, and West Virginia. These are stable and mature markets.

Source: Investor Presentation

We believe growth rates in Huntington Bancshares' markets may lag the national average for the following reasons:

(1) Below average population growth rates in these states

We have included in the following map the population growth rate in the U.S. between 2017 and 2018. As can be seen from the map below, most of Huntington Bancshares' major markets have population growth rates between 0% ~ 0.50%. This is below the national average of 0.60% not to mention that West Virginia's population experienced negative growth last year.

Source: Brookings

(2) Below national average GDP growth rate

In addition to slower population growth rates in its key markets, economic growth rates in its key markets usually lagged the national average. Below is a map that shows the GDP growth rates in the U.S. between Q4 2018 and Q1 2019. As can be seen from the map below, its key markets have GDP growth rates below 3% except Ohio (3.5%) and West Virginia (5.2%). In the same period, the national GDP grew by 3.1%.

Source: Bureau of Economic Analysis

If these GDP and population growth trends continue, we think it will be difficult for Huntington Bancshares to outperform other regional banks that operates in other higher growth markets.

Valuation Analysis

Huntington Bancshares currently trades at a forward P/E ratio of 10.18x. This is below its 5-year average P/E ratio of 11.91x. The bank's P/E ratio is higher than many other regional banks that trades at an average forward P/E ratio of 9.08x (see below).

Data by YCharts

A growing 4.2%-yielding dividend

Huntington Bancshares currently pays a quarterly dividend of $0.15 per share. This is equivalent to a dividend yield of 4.2%. As can be seen from the chart below, the bank has an excellent track record of growing its dividend. In fact, it has increased its dividend consistently in the past 10 years. As can be seen from the chart below, its dividend yield of 4.2% is towards the high end of its yield range since 2010.

Data by YCharts

Risks and Challenges

Macroeconomic risks

Huntington Bancshares faces macroeconomic risks. In an economic recession, the potential for consumer and business defaults may rise sharply depending on the severity of the recession.

High exposure to Michigan and Ohio

The bank has a high exposure to Michigan and Ohio. In fact, over half of its loan portfolio are derived from these two states. Economic weakness in one of these two states has the potential to significantly reduce its earnings and growth outlook.

Investor Takeaway

We like Huntington Bancshares strategic plan and its solid execution. However, we believe the bank will continue to face some headwinds in the near term. Therefore, catalysts to drive its shares higher may be limited. Hence, we think investors may want to remain on the sidelines.

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.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.