Huntington's Outlook Upgraded - Analyst Blog

Huntington Bancshares Incorporated (HBAN) rating outlook has been upgraded to "stable" from "negative" by Moody's Investors Services, the rating unit of Moody's Corp. (MCO). The upgrade follows the decrease in loan defaults.

Huntington's senior debt ratings have been kept at "Baa2" (Investment Grade) while the financial strength rating of its bank subsidiary is “C-” (Adequate). The long-term deposits ratings are “Baa1”.

The decrease in loan charge-offs and nonperforming loans coupled with solid capital levels for sufficiently absorbing any significant losses have prompted the rating agency to upgrade its outlook. Huntingtonexperienced a decline in the level of criticized commercial loans, reflecting significant upgrade and payment activity in the past few quarters.

If the asset quality metrics at Huntington return to the pre-crisis level along with consistent profitability, its ratings may be upgraded. But if capital ratios fall from current levels or if the company incurs debt in an acquisition, then ratings could be downgraded.

Third Quarter Results

Based in Columbus, Ohio, Huntingtonreported a third quarter 2010 profit of $100.9 million or 10 cents per share, ahead of the Zacks Consensus Estimate of 6 cents. The better-than-expected results were primarily driven by a significant reduction in loan loss provisions and better-than-expected growth in revenue. Nonperforming assets and net charge-offs declined while capital ratios also strengthened.

Credit metrics continued to show improvement at Huntington. Net charge-offs were down 34% sequentially and 48% year over year to $184.5 million. Net charge-offs were 1.98% of average loans and leases, down from 3.01% in the prior quarter and 3.76% in the year-ago quarter.

Total nonperforming assets also reported a drop of 30% sequentially and 53% year over year to $1.1 billion. The nonperforming asset ratio improved to 2.94% from 4.24% reported in the prior quarter and 6.26% a year earlier. Provision for credit losses was $119.2 million, down 38% sequentially and 75% from the year-ago quarter.

Capital ratios also improved in the quarter. Huntington's tangible common equity-to-asset ratio as of September 30, 2010, was 6.20%, up from 6.12% at the end of the prior quarter. Regulatory Tier 1 and total risk-based capital ratios were 12.76% and 15.02%, respectively, up from 12.51% and 14.79%, respectively, at the end of the prior quarter.

Our Take

We believe that the turnaround story at Huntington is right on track and the company is progressing well. The strategic initiatives to de-risk its balance sheet, strengthen its capital levels and reorganize its business should help the company navigate the current credit cycle and support earnings growth going forward.

However, the lack of growth in loans is expected to continue, given the sluggish economic recovery. Additionally, recent legislative actions are posing challenges for fee income to grow.

Huntingtonshares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. We have a long-term Neutral recommendation on the stock.