Huntington Reiterated at Neutral - Analyst Blog

We are reiterating our Neutral recommendation on Huntington Bancshares Inc. (HBAN) following the company’s earnings release. The reaffirmation is based on the company’s business model, strategic initiatives, credit environment, opportunities and challenges.

 

 

Huntington reported a profit of $48.8 million or 3 cents per share, ahead of the Zacks Consensus Estimate of a break-even quarter. The better-than-expected results were primarily driven by a significant reduction in loan loss provisions.

 

However, the reported quarter’s results were negatively impacted by $75.5 million (7 cents per share) of Franklin-related charge-offs. This relationship was inherited as a result of the acquisition of Sky Financial.

 

With a sign of decline in the values of the collateral supporting the Franklin loans and as part of the company’s strategy of de-risking its balance sheet, Huntington transferred $398 million of Franklin-related loans to held-for-sale at a value of $323 million during the quarter. This resulted in charge-offs of $75.5 million. Ultimately, in July, Huntington sold a significant part of these residential mortgages. The company intends to reinvest the sale proceeds.

 

 

We believe that Huntington’s turnaround story is right on track. 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.

 

With the economy showing signs of recovery, Huntington is experiencing better credit trends. We expect the steps taken by the government to ease the credit pressure of the customers should result in an improved credit trend in the upcoming quarters.

 

However, the lack of growth in loans is expected to continue, given the sluggish economic recovery. Huntington's growth is threatened by the profound economic weakness persisting in its geographic footprint. Its loan composite remains heavily weighted to the mid-Ohio to eastern-Michigan markets, which are facing more challenging economic conditions than other regions.

 

Huntington is also significantly exposed to commercial real estate and residential markets. The Midwest economic environment continues to be negatively impacted by weaknesses in the residential real estate development markets, commercial real estate market and softness in certain manufacturing sectors.

 

Additionally, regulatory issues will remain a concern. Though management has taken precautionary measures, the recent amendment of the Reg E (overdraft legislation) would cramp the company’s revenue from overdraft charges. Additionally, the recently passed Dodd-Frank Act and subsequent rule-making will impact the company.

 

Along with Huntington, we expect the regulatory issues to impact both top and bottom line of other companies such as JPMorgan and Chase Company (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and U.S. Bancorp (USB).

 

Huntington currently carries a Zacks #3 Rank (Hold), implying no clear directional pressure on the stocks over the next one to three months. Considering both the positive and the negative aspects of retaining this share in an investor’s kitty, we have a long term Neutral stance on the stock.