Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Welcome to Day 3 of Barclays 2026 Global Financial Services Conference. Very pleased if you join us this morning. We have almost a full day of presentations today as well, we go through [ 245 ], concluding with Goldman Sachs. From the -- kicking us off today, very pleased to have Huntington. From the company, it's Steve Steinour, Chairman and CEO; and Zach Wasserman, Chief Financial Officer. Steve is going to kick us off with some remarks and some slides, they put out a deck this morning and then we're going to do some Q&A. So Steve, please kick us off.

Jason, thank you very much, and thank you for 31 great years, and thank you to Barclays as well for hosting us. Welcome to everyone who's joining us today. This morning, I want to walk you through where Huntington stands today. How the operating environment has evolved over the course of this year, our management team has responded and why we remain confident in the earnings and long-term value creation of our franchise. So let's begin on Slide 3. There are 4 key messages that will frame the discussion today. First, Huntington's strategically well-positioned national franchise, with scale in markets that are expected to sustainably grow above the national average and numerous value-added fee businesses. We expect to drive strong organic growth through the decade and beyond. Second, we're driving solid operating performance amidst an operating environment that is materially different and more challenging than we had anticipated at the start of the year. Third, our integrations of Veritex and Cadence are tracking at or ahead of our expectations. And fourth, all of these factors support our ability to deliver robust long-term value creation for our shareholders. Turning to Slide 4. Today, Huntington is a super regional bank positioned for strong organic growth. We operate a powerhouse consumer and regional banking franchise across 21 states alongside a leading national commercial bank and have a comprehensive set of payment solutions, a full spectrum wealth management platform and capital markets businesses with broad capabilities. Across all the elements of the franchise, we operate with an aggregate moderate to low-risk appetite. So this combination of operating scale and risk management discipline is what enables us to sustain strong risk-adjusted growth. Turning to Slide 5. Our company looks fundamentally different than it did a decade ago, and that's the outgrowth of deliberate execution of our strategic vision and substantial investments. In 2015, we had a strong share in the Midwest with $50 billion in loans and $55 billion in deposits. Our national presence, however, was very limited to auto finance and a few specialty verticals, and our fee businesses were largely nascent. Looking today, we have an expanded geography and substantial scale with $189 billion in loans and $222 billion in deposits, combining Midwest leadership with meaningful and growing scale in Texas and the South. We're now present in 12 of the top 25 fastest-growing MSAs in the country, positioning us squarely in some of the nation's most attractive markets. And we have a leading national presence, including asset finance and 17 national specialty commercial lending and deposit verticals and commercial clients across all 50 states. Our value-added capabilities have broadened across a full range of services, including an expansion payment suite, a wealth and private banking platform and a full-service capital markets business, spanning advisory and investment banking risk management and capital raising and distribution. This is the result of sustained investment, organic expansion and disciplined partner integrations, and it's produced a franchise with greater customer relevance, multiple sources of organic growth and greater fee diversification. And these factors position Huntington to deliver sustained revenue growth with top-tier returns and value creation. Now on to Slide 6. Our franchise investments are resulting in a highly differentiated performance. For several years now, our organic loan and deposit growth has meaningfully outpaced peers. This has been driven by the expansion of our national specialty verticals, accelerating performance from our consumer and regional bank and our organic expansion into the Carolinas as well as Texas prior to our recent partnerships. This is clear evidence of our powerful investments in organic growth engines. Building on that same investment story. Slide 7 shows that the growth engine is not limited to lending and deposit gathering. We've also broadened and accelerated strategic value-added fee businesses, which have grown at a 14% CAGR since the second quarter of 2024 on an entirely organic basis, entirely organic basis, excluding the benefits of any acquisition, unpacking this performance for a moment. In Capital Markets, we added a strong base of capabilities, expanding and syndicated and leveraged finance, debt and equity capital markets and financial sponsor coverage, driving a 30% CAGR. In Wealth and Private Banking, continued platform and capability investments have driven 10% growth in households, resulting in a 37% increase in AUM and a revenue CAGR of 10%. And in payments, several initiatives, including bringing merchant acquiring in-house and expanding corporate treasury management capabilities have driven a 9% revenue CAGR. Over the last several years, fee growth has meaningfully outpaced the organic growth in our balance sheet, a reflection of the sustained investment we've made in capabilities across these businesses, and one that increasingly positions Huntington as a trusted resource for our customers. As a result, our expectation is to drive high single to low double-digit growth rates across all of these areas going forward. Turning to Slide 8. Another significant area of management focus this year has been on our integrations of Veritex and Cadence. And that's been a huge success for us. We converted both banks under our systems on an accelerated time frame with minimal issues, and we're achieving or exceeding the synergies we've targeted. Cost synergies are on schedule with the $70 million target from Veritex achieved in Q2 and cadence tracking toward $365 million run rate by the fourth quarter. More significantly, revenue synergies are tracking better than our original forecast with our cumulative outlook now at approximately $600 million through 2028 compared with our original expectation of $500 million. It's also important to recognize future earnings growth associated with these partnerships. Our focused execution will provide additional earnings power and investment capacity beyond the franchise performance we're discussing today. And turning to Slide 9 for a discussion of our performance year-to-date. Our execution against the priorities we laid out at the start of the year remains solid even as the environment around us has changed. The key takeaway is that most of our key operational drivers are tracking in line or better than our expectations coming into the year. However, the impact of interest rates and competitive dynamics on deposit costs and asset yields have constrained our NIM expansion to a level below our original expectations. To double-click on this for a moment. Balance sheet growth is on track with loan growth of approximately 36% year-over-year and deposit growth of approximately 33%, levels consistent with our growth expectations coming into the year. Fee income growth has accelerated to approximately 32% year-over-year, well ahead of our original 26.5% to 29.5%. And as we just discussed, our partner synergies are at or above gold, where the expectation has changed is around net interest margin. We came into the year expecting significant NIM expansion supported by a favorable yield curve and rational pricing conditions. Instead, higher short-term rates and elevated loan and deposit pricing competition have moderated NIM expansion even as we continue executing against the cadence deposit cost optimization. We've navigated this change in environment by managing the things we can control. And I want to spend the next few slides explaining that change in the environment. and our response to it in more detail as well as our updated expectations. So turning to Slide 10. There are 2 significant changes to the deposit pricing environment over the past several months. The first is the outlook for reference rates. As you all know, the market implied Fed funds path has shifted sharply higher since the start of the year, swinging from expectations of rate cuts to expectations for rate hikes. That flatter, higher for longer rate path has elevated deposit costs above the level we had anticipated at the start of the year. Compounding that dynamic is that deposit demand has intensified industry-wide. And as a result, we've seen our effective cost of deposits inflect higher beginning in the first quarter after a long period of improvement and has continued to increase through the course of this year, including by another few basis points after we reported the second quarter. Amidst all of this, we continue to win customers, deepen relationships and grow deposits across the franchise. The change, however, is that the economics of incremental growth have become tighter than we anticipated at the start of the year. Turning to Slide 11. We're seeing similar dynamics impact both loan origination volume and yields. For example, industry loan growth has accelerated sharply from around 3% in June of last year, to 7% in June of this year. This appetite for loan growth is evident across various asset classes. For example, indirect auto is a product area where increased competition is compressing risk-adjusted returns as some large bank competitors have been ramping production at the expense of spreads. Rather than expand our credit box or cut yields to chase volume, we've held our underwriting and return standards. We've chosen to accept lower production where incremental spreads did not justify the additional lending, thereby conceding some origination volume, but sustaining our overall returns for the portfolio. Commercial real estate is another area of pressure. We've seen payoffs in this portfolio accelerate as underwriting, deal structure and pricing from some private -- from some banks and private credit sources have moved to levels we consider uneconomic. In addition to that, the permanent capital providers, Fannie Freddie, are also in an accelerated refinance mode. And while this is creating a headwind to our growth, we view it as constructive to the desired risk profile of our commercial real estate portfolio. As we've discussed, we intended to lower the concentration of commercial real estate loan portfolio over the course of several years. We announced that at the beginning of the year. But it's currently happening at a much faster pace than we envisioned. Turning to Slide 12. So what have we done to mitigate these pressures. First, we've not compromised our disciplined risk-adjusted returns. Second, across the balance sheet, we've continued to optimize loan mix and deposit pricing, and we've successfully driven fee-based revenues, including treasury management and capital markets. And we accelerated our expense reengineering program for this year with expectations of additional expense control in '27. For example, we've increased our cost reengineering target for '26 and more than doubled it for next year. So what has changed more recently? In Q3, the factors I noted on the prior 2 slides, deposit cost pressure and asset yield compression have persisted beyond what we had recently anticipated and accelerating paydowns in commercial real estate have increased. Now this has reduced our loan growth and net interest income outlook for this year beyond the level that could be offset by further fee growth or additional efficiency actions. For this reason, we're recalibrating our outlook for this year and '27 to reflect the current operating environment. We continue to see strong demand across the franchise, and we remain disciplined in growing and allocating capital where returns meet our hurdles. This discipline supports credit quality, protects risk-adjusted returns and allows us to keep investing in the capabilities that drive long-term value creation. Turning to Slide 13 for a discussion of our updated outlook for '27. With what we're seeing in Q3, we're revising our 27% EPS target range to $1.75 to $1.83. The revised range reflects the current pricing dynamics, the near-term actions we're taking to mitigate some of the funding and asset yield pressures and contemplates a wider range of operating outcomes than what we considered even a few months ago. Our outlook today reflects the continuation of prevailing macro and competitive conditions, sustained core funding and stable credit. With slightly lower expected loan growth, we expect to upsize our share repurchase program by an additional $200 million to $1.3 billion to $1.4 billion next year. While a path to our prior target range still exists. We believe it's more critical to protect the long-term strength of the franchise, preserve the customer experience that differentiates Huntington and continue investing in the competitive advantages that support our organic growth. So taking a step back for a moment on Slide 14. Our revised outlook indicates substantial earnings growth, strong returns and significant tangible book value accretion and programmatic capital return. We expect EPS to grow more than 20% versus fiscal year '25 while steadily increasing our ROTCE. Tangible book value per share is expected to grow more than 10% off of today's level. And on capital return, we've completed approximately $360 million of share repurchases year-to-date of the planned $550 million for this year. And as I noted, we're upsizing the program for '27. These metrics, even updated to reflect our revised earnings expectation still represent significant value creation. So concluding on Slide 15, the events of this year have not changed our value creation model, the same flywheel that has transformed Huntington over the last decade remains intact. The flywheel has some -- has powered some remarkable outcomes, including de novo, geographic expansion of our commercial, along with our consumer and regional banks into attractive new markets, such as the Carolinas, our commercial verticals, which are continuing to gain momentum in the market as they mature, and award-winning digital platform that serves as a source of customer acquisition and engagement. And following the integrations of our recent partnerships, our flywheel is helping to drive $600 million of anticipated revenue synergies and our ability to invest in high-growth markets across Texas and the South. In closing, we're confident in the franchise we've built, it's more diversified, more capable and more relevant to our customers by far than it was a decade ago. We're navigating a more challenging operating environment with discipline, and we remain committed to delivering long-term growth, enhanced returns and outstanding shareholder value creation. Zach and I now look forward to taking your questions. So Jason, back to you.

I guess you took us through why you're making these changes to the 2027 earnings guidance. Can you maybe just help us understand what's driving the magnitude of that revision?

Well, the environment has evolved progressively with a cumulative pressures increasing over the course of the year. In the third quarter, yet again, we saw incremental pressures that we've come to recognize we're not going to -- as a result, we've come to recognize we're not going to achieve the full year earnings expectations that we previously said. That's primarily a function of the interest rate environment and the competitive environment that I noted in my prepared remarks, but we've also made choices of how we want to allocate capital and risk returns versus risk and returns. So the 27% EPS guidance reflects cumulatively what we're -- what we've seen. And we've tried to be very thoughtful about how that may continue to manifest itself going into next year. We've taken expense actions. We've done deposit pricing and loan optimization. We've adjusted the mix, and we'll continue to do a number of these things. What we won't do is change our credit discipline. And we're going to be very disciplined about our risk-adjusted returns. We believe that continuing to invest in the businesses, particularly in these newer businesses and markets, will pay huge dividends for us going forward. The strategies are working. The core execution is strong, as we talked about. We're delivering the loan deposit fee growth at or above the levels we expected as we came into the year. And we still expect to drive significant EPS and tangible book value growth going forward for '27. So the things we can control directly, we think we are responding to. And we're going to have a 17-plus percent return on equity next year at these levels. Maybe Zach could be a little more specific.

Thanks, Steve. Good morning, everybody. And Jason, thanks for having us. I think as Steve did in his prepared remarks and just now in that question, clearly, over the course of this year, we've seen a gradual increase in headwinds against the net interest margin outlook for the business, not only in '26, but also forecasting out into '27. And our objective has been to continually offset those and solve for those pressures not only this year, but into next year. It's been a variety of factors we've done to do that. One, very much focused on deposit cost optimization. We've discussed over time the fact that cadence coming into our business represent the opportunity to optimize deposits, and we've been leaning into that, optimizing where we're generating loan growth accelerating fee growth strategies, which have accelerated fee growth above our plan this year and would then carry on into 2027. And as Steve noted, very significantly increasing the expense reengineering plan. And those largely offsetted the -- those pressures as we were operating throughout the year. But what we saw in the third quarter and really as we saw the results for July, late in July into early August and that we saw again in August, another step down in terms of several factors. One was lending volumes. And as Steve noted, an acceleration of the pressures in CRE and residential mortgage and a meaningful acceleration in terms of the competitive environment in terms of indirect auto that caused us to want to reduce production. To give you a sense of magnitude, my expectation now for the third quarter is we'll see lending volumes on an ADB basis, on an average basis, actually lower by about [ 1.5% ]. And in the third quarter versus the second quarter. That will be the first time we've seen ADB decline sequentially in a number of quarters. Now we did see lending production increase and firm up in the back half of this quarter as we're operating right now in September. And I do expect on an end-of-period basis to actually be higher in the third quarter versus the second quarter. And seasonally, typically, the fourth quarter for us is a very strong quarter, and I expect to see, again, sequential growth there. However, the run rate of our organic loan growth had been between 8% and 9% and it's running right now around 6%. And so we think it's prudent at this point to plan for that level, at least at the low end, as we think about next year. The other factor that we continue to see, as Steve noted, was pricing in both the deposit and loan yield environments, which is making us believe that planning on a more flat NIM path, again, at least at the lower end is appropriate as we go until the back half of this year but next year. And then lastly, I would say, as we considered adjusting the earnings expectations for 2027, what was critical to us is that we have very, very strong confidence in our ability to achieve those results and hence, capturing a wider range of the interest rate environment a wider range of the outlook and potentialities around the competitive environment, and of course, the geopolitical and other environments that are affecting the industry at this point to factor those in into a wider range of potential results.

Jason, if you don't mind, I'll just add a little color to it. So commercial real estate rates going up, you would expect to see a surge in refinance activity where you could go from floating generally with us to fix. And so we expected a certain amount of that, we're seeing twice 2x what we expected to see. And that's from both legacy Huntington as well as new partnerships. We're very big in auto. We've been very disciplined for decades in this. A year ago, we were generating about $850 million in auto loans at a mid-high teens return. Now we're probably 500-ish at a 12% return, and that's our absolute -- no, we're not going to go below that. Yet the new sales and UCL volumes are essentially the same. So there's been a market dynamic shift that has occurred. Again, a couple of large banks buying the market. Typically, we would see that for 1 quarter, maybe 2 over a period of time. We're now in the third quarter, no signs of abating. I don't know that, that changes in the foreseeable future. And so as we put the lower end of this range together, it's with a view of some continued pressure, particularly in certain asset classes.

I guess, Steve, in your remarks, you talked about the cadence [indiscernible] synergies running in line to better than expected. The one will surmise maybe these issues are more prevalent and kind of heritage Huntington footprint? Is that par characterization?

Well, the -- it's really a NIM expectation that's adjusting. The volumes are generally in line with the exception of commercial real estate, auto and resi mortgage. Those 3 asset classes, in line with -- we're going to have a $7.5 billion commercial origination of quarter this year, which will be one of the higher ones. And our fourth quarter looks good, but we're swimming against the tide of refinance or lower consumer activities, including in some cases, the books actually declining on the consumer side as well. So the core is performing well. The partnerships are performing very well. We increased the revenue outlook, synergy outlook for Cadence and Veritex. We have a number of areas that are off to very strong starts, in cadence in particular. And we're optimistic about how this will come together. It's just we've got a 5 to 10 basis point NIM change.

Got it. And maybe exactly we can maybe unpack a bit the 2026 guide. You pointed to $1.52, $1.54. Maybe as we think about the back half of the year, setting the stage for next year, anything you talk about 33% loan growth, 33% deposit growth, slightly lower than the 2Q guide, maybe expand enter what's changed?

Sure. Well, as I noted, I think kind of the organic run rate that we're seeing in loan growth has gone from around 8% to 9%, and that was what we saw throughout the course of '25, entering '26, running at around 6% right now. That should leave us on a full year basis, inclusive of the impacts of the 2 partnerships running with loans at around 36% year-on-year growth. To be clear, that's within the growth range that we had originally set for the year. With that being said, if you would ask me coming into Q3, based on what we're seeing throughout the early part of the year, our expectation was to be above the growth range for loans. And so this is a modest reduction back into that growth range. From a deposit perspective, I would expect to land at about 33% growth year-on-year, which again was within the growth range we've given before. Ultimately, our approach to deposit gathering is to core fund loan and asset growth. And if loans are going to be a little lower, we'll bring deposit gathering down a little lower. But again, those are both within the ranges we had set. Ultimately, from our perspective, this is a capital allocation decision. And we want to be very, very disciplined stewards of capital. If we're not seeing the appropriate returns of the margin, we will modestly bring down loan growth match fund with deposit growth and ensure that the overall return on capital profile of the company is maintained. And as Steve noted, our expectation is to gradually improve that.

I think you talked to -- I didn't see NIM on the slide, but in the past, you talked to NIM rising in the back half of the year to low to mid-3.20s? I guess how are you thinking about that now?

Yes. When we came into the -- in the third quarter call in July, I noted that we were expecting our NIM, which was 3.21 in Q2 to rise into Q3 and then to further continue to rise thereafter. We are seeing the increase into Q3, so that's encouraging into the low to mid-3.20s. However, as my expectation now will be at least at the lower end scenario at that same level, low to mid-3.20s in Q4 and continue to track at that level as we go into the back half of next year. The drivers are very similar to what we've been discussing over time. We're benefiting from fixed asset repricing, given the higher yield curve, both in terms of loans and importantly, securities where we're seeing the securities cash flow being reinvested at higher rates. However, our expectation is that this interest rate environment will continue to drive a gradual increase in deposit costs over the course of time, and those things will largely offset each other in that lower scenario. There are clearly scenarios and we think it will be favorable if the Fed changes interest rate posture, frankly, either higher or lower would benefit us in terms of the flexibility and the mechanisms to drive optimization. And so that -- there are scenarios where NIM is higher into the mid- to high 3.20s potentially as we go into next year, and that's the source of that range.

Got it. And then maybe anything on fee income or expenses to call out?

Yes. Fee income has been an area, as I noted that we've really leaned into and worked to accelerate our growth initiatives. The teams are executing exceptionally well. We're seeing on an organic basis, not including acquisitions, double-digit year-over-year growth in revenues driven by payments, wealth management and capital markets, exceptional execution by the team. In fact, our outlook for this year is 4% higher fee growth then we set our targets initially as we came into 2026. Our expectation for the third quarter, we're seeing another strong quarter in fee growth this quarter will end somewhere in the [ 7 30s ] in terms of fee revenue for Q3. Q3 is seasonally lower than Q2. Our expectation, we'll see that rise again on a sequential dollar basis into Q4 and continue to drive high single to low double-digit year-over-year growth in fee revenues, which is also consistent with our expectation as we go into next year. On expenses, the overall expense model continues to be executed very well, underlying very rigorous expense discipline or reengineering baseline operating costs, as Steve noted in the prepared remarks, increasing that reengineering program meaningfully in both 2026 and for 2027. We've gotten now a full line of sight to the 2027 program. That should drive overall expenses this year to stay within the range we've given before, 32.5% to 33.5% and should end in Q4 with an efficiency ratio of somewhere in the 55.5% to 56% range.