Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Hey, this is Jason Goldberg from Barclays. Thank you for joining us with our financial services conference today. Next up, we have Huntington. [Operator Instructions] From Huntington, I'm very pleased to have Zach Wasserman, Chief Financial Officer. We have Rich Pohle, Chief Credit Officer. I think we have Andrew Harmening, Consumer and Business Banking Director; and of course, Mark Muth, Director of Investor Relations. With that, let me turn over to Zach.

Thank you, Jason. Thank you all for joining us today on the webcast and for your continued interest and support of Huntington. I'm joined in the room today, as Jason mentioned, by our Consumer and Business Banking Director, Andy Harmening; and our Chief Credit Officer, Rich Pohle; and Mark Muth and Mark McKeen from our Investor Relations team. Before we get started, I would like to direct your attention to Slide 2. Please read and understand this slide as we will be making forward-looking statements today. During our prepared remarks, we will discuss 4 topics. I will provide an overview of our strategy to be the leading people-first, digitally powered bank in the nation, an updated view of our third quarter expectations and then a brief update on our customers' forbearance activity as I know this is an important area of focus right now as we all continue to assess the credit impacts of the pandemic-induced recession. I will then turn it over to Andy, who will discuss the exciting evolution of our Consumer and Business Banking businesses over the past few years and some exciting new product features we launched in September. Finally, we will turn it back over to Jason for the Q&A session. Let's turn to Slide 3 and get started. Huntington's overarching strategy is to build the leading people-first, digitally powered bank in the nation. This bold vision seeks to capitalize on the competitive advantages we have built by providing a superior customer experience, distinguished products and services and digital capabilities. We are further investing in these and other key growth initiatives to drive performance for years to come. First and foremost, Huntington's strategy reflects the fact that we are a purpose-driven company. Our purpose is to make peoples' lives better, help businesses thrive and strengthen the communities we serve. We have a proud legacy of more than 150 years of service to our customers and our Midwestern communities. This purpose drives our ambition to deliver top quartile financial performance and superior customer experience. And it informs our strategic plan, which is focused on driving organic revenue growth across all of our business segments. Huntington is deeply focused on long-term revenue growth, investing in the products, services and infrastructure that will drive sustainable growth and outperformance. This long-term focus is evident in key strategies such as our commitment to develop best-in-class digital capabilities and a proactive long-term balance sheet optimization strategy to manage our net interest margin in the face of the low-for-long interest rate environment outlook. Next, as we have previously discussed, over the past decade, we have fundamentally changed Huntington's enterprise risk profile. Our disciplined risk management approach provides a strong fundamental position. The Board has established an aggregate, moderate-to-low risk appetite for the company, and we have implemented appropriate controls. It manifests in our business model, balanced between commercial and consumer, which provides diversification of revenue and credit risk. Our commitment to an aggregate moderate-to-low risk profile is illustrated through the DFAST results, which we're tied for best in the peer group this year and have been in the top 3 of the peer group in each of the last 5 DFAST cycles in which we have participated. This commitment to risk management also means maintaining a strong balance sheet, including robust capital and liquidity. Finally, we have closely aligned the interest of our Board, executive management and our colleagues with the owners of the company via mechanisms such as our hold-till-retirement equity requirements. And we are now collectively 1 of the 10 largest shareholders of the company. Slide 4 provides an updated outlook for our expectations for the third quarter. Generally, our views have not changed much since the second quarter earnings call in July, although both revenue growth and deposit growth are coming in better than expected. Looking at the balance sheet, we expect average loans for the third quarter to be approximately flat on a linked-quarter basis. Consumer loans are expected to increase approximately 2% driven by continued growth in residential mortgage and RV and marine lending. Commercial loans are expected to decrease approximately 1% as the full quarter impact of PPP is more than offset by continued reductions in dealer floor plan and other commercial loan utilization rates. On the second quarter earnings call, we discussed measured optimism regarding a build in the early-stage portions of our commercial pipelines. We remain optimistic that business activity will continue to improve particularly late this year and into early next year. We now expect average total deposits to increase approximately 1% linked quarter, whereas previously in earnings, we were expecting a 1% decrease. This is reflective of better-than-expected deposit inflows and retention, resulting in even higher levels of excess deposits and liquidity on the balance sheet. As Andy will discuss later, we continue to see strong online deposit account opening, while our traditional branch-based account acquisition is approaching pre-COVID levels. We now expect total revenue to increase approximately 4% linked quarter, up from a 2% increase expected back on the earnings call. The increase in revenue is entirely on the fee side as our outlook for between 3% and 4% spread revenue growth is consistent with our prior guidance. We continue to expect net interest margin to expand in Q3, now estimated to be approximately 2 to 5 basis points higher sequentially. Deposits are meaningfully in excess of our prior forecast, though, resulting in elevated cash at the Fed, which has impacted our prior expected NIM expansion by about 5 basis points. We now expect fee income to increase more than 5% linked quarter as better-than-expected mortgage banking revenue benefits from continued robust origination activity and even wider secondary spreads. Other pandemic impacted revenue lines are also rebounding as expected. There has been no change to our expectations for noninterest expense, which is forecasted to increase approximately 5% sequentially, 2% of which is driven by approximately $15 million of restructuring costs related to our 2020 expense management program, and 3% of the 5% is driven by increasing investments in technology and marketing and the return of customer and sales activity to more normal levels. Lastly, our scenario analysis for the full year 2020 continues to highlight likely positive operating leverage for the eighth consecutive full year. Finally, as we continue to expect net charge-offs for the third quarter to be approximately 65 basis points plus or minus 5 basis points for Q3, fundamentally, our credit remains sound, and delinquencies at August month end are good. Our charge-offs will reflect the sale of a number of oil and gas loans, which together will be a large portion of the overall charge-offs for the quarter. The level of payment deferrals has been a topic of interest since March. We're pleased to report that our total deferrals have dropped from 9% of the portfolio at the end of June to just 2% at the end of August. Slide 5 provides updated details as of the end of August for the financial accommodations we provided to our commercial customers. As we forecasted on the 2Q earnings call in July, commercial deferrals have dropped significantly and are now just $1.1 billion, down from $5 billion at June 30. As we projected, second deferrals are centered on the hospitality and other travel-related businesses. Slide 6 shows our consumer deferrals, and the trends continue to be favorable here as well. Total consumer deferrals are now $600 million, down from $1.8 billion at June 30. Our auto and RV/Marine and our home equity portfolios are performing as expected, with modest post-deferral delinquencies. The mortgage accommodations are also meeting expectations, with 80% of our customers who requested a deferral now having exited their initial deferral period with a new payment plan in place. Our consumer lending focus remains on high FICO customers and has, thus far, served us well. I will now pass it over to Andy to expand on our strategy in the Consumer and Business Banking space. Andy?

Zach, thank you very much. So look, Huntington's digital evolution is a story I'm very excited to share with you today. I arrived at Huntington just over 3 years ago with a mandate to expand our competitive advantage that we've enjoyed in our branch network to our digital channels. So today, I'm going to cover really 4 major categories. The first one is the journey we've been on to transform the digital experience that our customers have and the competitive advantage we have established by being differentiated. The second one is a focus on how we built our core and building our core, whether that be in platforms, core platforms or that's our core digital delivery. Now and importantly, these have and our foundations that we believe are expandable, first, to help drive digital sales origination as well as changing and expanding the branch experience to include virtual and digitally assisted delivery. Next page, Mark. So 3 years ago, we started down a path to, first, differentiate our digital experience; and then secondly, create tools based on customer feedback in both design and experience. That led to the creation of The Hub platform. This is our digital landing page. It also led to artificial intelligence-driven insights, Heads Up. And most recently, last week in fact, our external launch of Money Scout, an AI-powered free digital tool, personalized and open in less than 2 minutes. Now our Hub platform and associated tools in many ways proactively looks out for our customers in categories they've already told us are important. Let me explain what that means to me. Heads Up, for example, this is not a reactive tool, this just happened, although it can be. By proactive, what I mean is it looks at spend that you have. Say you have subscriptions that we forget about, 1 year later, it comes due. Before that comes due, it knows your spend pattern, it knows what you have out there, and it says, hey, this subscription is coming due. It is literally proactively telling you what might happen next. Emergency savings. For millions of Americans, we found during the pandemic, they are calling us and telling us, "Do you have a tool that can help us save?" I'm very proud to say not only do we have a tool, but it's a digitally led tool on Money Scout. Again, the same personalization of your income and expense, and it automatically drives dollars into your savings account. 2 minutes to set up, it's in session, you can change it at any moment that you want to. Then The Hub overall, we didn't just create budget tools, we created tools within this budget that looked at your spend, your flow, and then it gave you a recommended budget. So many times, people say, "Where do I start?" We proactively put it there. And guess what, if you don't like it, you can discard it and make it whatever you think it should be. Now at the same time, we're working to differentiate our digital delivery. We have launched today, externally, we've launched 2 new liquidity products that compete well with an emerging disruptor, and that disruptor is fintechs. The new overdraft fee -- the no overdraft fee, $50 Safety Zone allows for our customers to have overdrafts paid with no fees up to $50. You overdraft $40, we pay. The items are covered. There's not a charge. You just bring in a deposit at a later date. If you exceed $50, that's when Grace comes in. We've had 24-Hour Grace for consumers. Now we have it for all of our customers. And what that means is if you bring in a deposit by midnight the following day through any channel, your overdraft is covered. The combination of these 2 is very customer friendly and can stand toe to toe with any overdraft offering in financial services, bank or fintech. These were used as both an acquisition lever and retention lever. Next page, please. In addition to the 3 digital solutions highlighted on the previous page, we have launched over 100 digital projects in just the last 24 months. As you can see on this page, it's not a one size fits all. The needs of each customer segment, whether that be Consumer, Private Banking, Business Banking, are unique. So we deliver [ tailored customer ] experiences within these 3 segments that are unique as well, and they're based on customer feedback. On the right-hand side, I'm specifically calling out our mobile banking platform focus or mobility. And the question as to why is very, very clear. In the second quarter of 2020 alone, we averaged, averaged, 37.8 million unique logins per month just through our mobile channels. That's over 81% of our total logins to all digital channels. It represents an increased trend towards customer self-service for routine transactions such as balance inquiry, person-to-person payments, remote check deposit. You can see on this page, some of the specific mobility projects that were launched. Again, these are just a few examples to give you the idea of the breadth of the work that's being done. Next page, please. It was important that we got these digital and mobile features right as usage, which is already on the rise, accelerated even more in the second quarter of this year. If you look at the top right, you can see we're year-over-year, Q2-to-Q2, a 45% increase in logins during that period of time; but again, already on the rise. I do want to note that our lobbies were largely closed during this period of time but is also becoming very clear that new usage habits are being formed right now. The usage that we see here across all of these different graphs is a good indication of customer engagement. What else happens when a customer is digitally engaged is they attrit at a lower rate. We have seen attrition go down each of the last 3 years. In fact, we have a remarkable click-through rate of our active digital customers. 57% of them have clicked on a Hub tool. These folks are engaged, and they're staying with us. And while digital engagement is clear on the various charts listed, we also compare favorably to the industry when looking at independent research and many other key indicators of digitally active, including made a remote deposit, made a bill payment, made a person-to-person payment, digitally active in the last 30 or 90 days. Now the products are great, and they're a differentiator. But the other thing that we had to do is start, implement and train to a digital coaching program, and we've done that. With over 800 people trained throughout our branch network, we have power users and trained coaches in every single branch in the network. This changes the trajectory of getting people logged in by an expert who knows the product. Next page, Mark. Well, I have to say this is maybe my favorite slide of the entire presentation. The mobile banking platform is the most used. It's the fastest-growing digital platform. And for that reason, it is the one that matters the most. Now we have been ranked #1 in mobile satisfaction -- mobile app satisfaction by J.D. Power for 2 years in a row. And you can see the headline. In 2020, we are #1 among all regional banks in mobile banking satisfaction, mobile app satisfaction. In 2019, we are #1 among all banks in the industry that were in the survey. And let me be very clear on that point, that includes every major money center bank. In an area that matters most, we are a top-in-class performer. Now the same team that delivered this top-in-class performance, the same team that delivered this award-winning experience is now building our digital sales experience as well as our digital branch tools. Next page, please. As you can see on this slide, I'd point out an increase in our development hours each of the past 2 years and an expectation that 2021 will also show an increase in those hours. But just as importantly, we have built a core. And what I mean by that is we built our own mobile platform. We brought that in-house. We've -- our Internet banking platform is in-house. Our alerts platform is in-house. And this, by itself, has increased our ability to customize experiences and increase speed to delivery. But what has also allowed us to do is marry our work with many, and you can see on this page many world-class fintechs, to offer additional solutions at an accelerated pace. So in-house platforms, fintech partnerships, but something we also did is we moved to agile development in 2019, and that has materially improved our speed to market. This is illustrated in the lower left-hand chart. What I would point out when we say digital features release, let me just first explain what that -- first explain what that could mean. That could be Money Scout. That could be card controls. That could be a chat bot. It could be anything from the prior page of the 16 items that we had listed. Our releases are up from the same period prior year, an amount that exceeds our spend increase. We have become more efficient and more productive at the same time. So this combined digital, IT, agile team, they're now executing on projects across the consumer and digital bank. Projects like an in-branch account opening, which has led directly to deeper account relationships, but we've used a digitally assisted process and increased digitally active customers from the inception of a relationship. I'll talk a little bit more about why that matters. Next page, please. If you take nothing else from this page, recognize that we're busy. We have a team that can execute, and our core digital team is now laser-focused on digital sales origination, partnering with each of our respective lines of business in consumer finance, in mortgage and business banking. Digital sales, just as digital service, is a customer experience play. We have the core team. We have the platforms in place that gives us confidence that we're going to be able to execute on all these core pieces in 2020. Now everything from third quarter on, obviously, fourth quarter is an estimate of what we believe we are going to bring to market. So remember, the products are different, but the delivery approach, the agile teams and pods with a focus on ease of use, it's the same. So as we accelerate in digital sales in 2020 and 2021, we create optionality for our customers and for our future expense planning with regards to the play of physical versus digital distribution. Next page, please. Some important facts I want to start with on the branch conversation. First, we have consolidated 157 branches over the last 3 years. That's about 16% of our network. We've reinvested those funds back into digital delivery. But it's important to note that the branch remains the primary source of most new consumer sales today, deposit dollars, home lending and credit card. In fact, in 2020 -- August of 2020, we are at 93% of same month prior year sales in our traditional branches. With regards to transactions, in August of 2020, our traditional branches are at 78% of the same number that we saw in 2019. We reopened our branch lobbies in full -- in a staggered event but in full in July, partially in June and now in August. And in those 3 months, we had the best 3-month period of time in net account growth that we've had in the last 18 months. But if you look on Page 14, I'm saying that because that means, clearly, the branches still matter. I don't want to prove a negative. The branches still matter, but the experience is changing. So the branch sales experience is evolving, and 25% of our appointments are virtual. So we got our line of business heads together, along with our digital team, and we surveyed them on what they needed to be effective to sell remotely. So virtual sales with digital assistance is the evolving story and one we feel really good with regards to our road map, our delivery team and our ability to deliver best-in-class customer experience. Some of the tools we've used at account opening are already able -- we're able to use those in digital sales collateral, meaning we're able to push out that experience, ask guided questions using digital, get that information back. And when we do that, the next step is we're actually going to be able to push out the entire account opening process once we're able to authenticate our customer. So we're going to have virtual collaboration, in fact, we do right now through Microsoft Teams. So we have screen sharing, we authenticate, we have a sales process, and this is all going to be either launched or piloted by the fourth quarter of this year. We will continue to focus on differentiated product offering, and we believe 24-Hour Grace now for business and consumer teamed with no overdraft fee, $50 Safety Zone is already a best-in-class offering, an offering that our customers and our prospects have said they want. And then finally, I'll just conclude with this. Our combination of digital differentiation, product differentiation and our legacy physical delivery and our colleagues and our branches put us in a unique position to serve our customers, attract new customers, retain our customers and, finally, deepen relationships. Thank you. Mark?

All right. Thank you. Jason, back to you for the Q&A.

Thanks, guys. That was definitely a very informative presentation. I guess, maybe the first place to start -- and Mark, if you want to stop sharing your screen, we can all kind of come into full view. Also on that, those on the line, if you have audience response -- if you have questions, please type them in. We have about 10 minutes left, and we'll certainly take questions from the audience. And if we have time, look at the automated response questions. But a couple of questions from the audience before I delve into mine. And the first one is, how is management thinking about positive operating leverage beyond 2020? Obviously, 2020 you expect to be the eighth straight year. I guess the question they're asking, if the interest rate environment holds, can we expect a ninth straight year in 2021? And just maybe how you're approaching the 2021 budgeting process.

Yes. So this is Zach Wasserman. Thanks so much, Jason, for that question and whoever submitted it online as well. Maybe I'll just start my comments by saying positive operating leverage, we believe, is a key element of the value creation and earnings model for the company. So on average, over time, we think positive operating leverage and the margin improvement that it represents is a key tenet of our business model. And so we always think about that, we plan for it, and we -- that's our objective on average over time. With that being said, we manage the company for the moderate to long-term sustainable growth profile that we pride ourselves on delivering. And so we've said this in other forums, there may come a point where we say in a certain period of time that the expenses that we're driving and really the investments within that expense base are so important or are well timed enough to generate returns that we want to continue to grow the expenses at a rate that's faster than revenue growth. And if that time comes upon us, we'll explain it and disclose it and manage through that. It's too early to say what 2021 will look like at this point. We haven't even begun the budgeting process. As I indicated in my prepared remarks that 2020 is looking like -- will likely be the eighth consecutive year of positive operating leverage, as you noted in your question. We'll have to see on 2020 -- 2021. I think that there's probably 2 factors I'll just close with. One is we do believe that we will start to see the recovery solidifying here in the back half of 2020 and 2021, and it will represent a period that we'll seek to capitalize on in terms of accelerating growth, accelerating market share gains. And hence, the investments that we're making now in the back half of '20 and as we go into '21 will be very important. And we think we're primed to really make those investments in a way that's going to generate great return. Couple that with we do expect 2021 to be a challenging revenue year. We're going to have a grow-over on some of the PPP revenues that we're generating in 2020. And we do expect continued modest but present headwinds on net interest margin and some other revenue drivers. So that is setting up to be a challenging year from a positive operating leverage perspective. We'll have to see where we land on it as we continue to do our budgeting and final planning. But I would expect, kind of as I look out over the longer time out into '22 and '23 and beyond, that commitment to positive operating leverage is in place. And it's a key part of our business model, as I said.

Helpful. And I guess one of the other comments you made in your remarks is -- talking about loan growth, you said, optimistic and could be more optimistic -- or optimism could increase later this year and into next year.

Yes.

I guess, what are you seeing in terms of giving you that source of optimism? Is that kind of Huntington specific you think? And what's driving that? Is it more industry-wide, just given how, I guess, challenged loan growth has been over the last several months?

Yes, it's a great question. I think part of it, we're benefiting from our Midwestern footprint. The economies in our footprint are generally consistent with the rest of the U.S. economy, but we are somewhat overweighted toward manufacturing. And we've seen a really strong rebound in manufacturing. So that will help. I think part of it as well, in our broader business lines, we benefit from a number of them which, unfortunately, were impacted by the COVID environment, for example, auto, floor plan loans went down quite a bit as OEM manufacturers had supply chain issues. Those are still now resolving, but the outlook for the balance of this year and into early next year is very positive and constructive. And we're seeing nice pockets of demand in lots of places within our commercial book, in the asset-based lending, equipment finance, sort of larger and middle market and the consumer book and business banking is doing very well. Consumer mortgages continue to be extremely robust. And then our auto and RV and marine business are also seeing nice, solid and improving demand. So it's in pockets. But I think as we take a step back, we do expect to see that acceleration here toward the back half of this year and particularly into the first part of next year.

And you kind of talked about this new $50 Safety Zone expanding the Grace product to the commercial side. Is there any sort of kind of adverse fee income hit we could expect kind of in the fourth quarter or next year from the rollout of these products? I get they kind of help with marketing and attrition, but is there any kind of fee income give-up associated with that?