Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning. This is Steve Steinour. We're having some technical issues in the BofA conference. Erika is expected to join but is not available. We're about 10 minutes late now for today. So thank you for joining us online. Pleased to be with you, along with our team. I'm going to start, and then, Erika, as I said, will join us, we hope, at some point. If not, there are a number of questions that have been presubmitted, and Mark Muth will ask them. Now as we stated on the recent earnings call, we're optimistic on the economic outlook as a healthy recovery in our footprint economies is underway, the manufacturing sector providing leadership. Over 2.6 million jobs were created in our footprint states between April and September. Payrolls grew 11 -- over 11% compared to 8.8% for the nation during the same period. The Midwest accounted for 50% of the total new manufacturing jobs in the nation between April and September. So this V-shaped recovery in manufacturing is expected to provide a continued boost to the regional economy, maintaining outperformance relative to the nation over the near term. And as you'll recall, a year ago, many of our customers were restrained by skilled labor shortages, and the most recent job openings rate and manufacturing rose to its highest rate since November 2018, resuming high prepandemic labor demand amid an overall shortage of qualified workers. Now strong vehicle sales and tight inventories, created in part by the mandated shutdowns, have elevated new orders for motor vehicles and other equipment to record levels in July and August. Business equipment investment has returned to its highest level since 2018 in our most recent review of data. We're seeing these positive economic headlines manifest in our commercial loan pipelines, which continue to rebuild. There remains some hesitation among businesses regarding the lack of clarity around the election, hopefully, just in the process now of getting adjusted; the virus; as well as the economic recovery overall. But we expect commercial loan production to pick up late this quarter and next year. This act is a nice complement to the consumer side where home lending, auto, RV/marine continue to produce steady originations. Home lending, in particular, continues to produce very, very good results. We also continue to see many consumer and commercial customers maintaining elevated levels of liquidity, which we expect to persist for some time. We're actively managing both sides of the balance sheet to optimize returns. We manage a simple business model focused on the execution of our strategies, which build on the competitive advantages in our core businesses. The business model, balance between commercial and consumer, provides diversification of revenue where good performance is offsetting challenges in some areas. We're focused on driving organic revenue growth across all of our businesses. We also continue to innovate, introducing new products and product features and to deliver distinguished customer experiences, all supporting our purpose, which is to make lives better -- people's lives better, help businesses thrive and strengthen the communities we serve. Our differentiated product offerings and the high level of customer service fuel our continued organic growth. Deepening all relationships remains a key focus for our colleagues, and there's still significant opportunity within our customer base. Our optimistic view of the economy and the momentum we currently enjoy across our businesses are driving our efforts to accelerate certain aspects of our strategic plan. We're investing in people, digital technology and other strategic business initiatives that will drive revenue growth over the near, intermediate and long term. Our digital and mobile technology strategies continue to be a key area of investment, and these investments will further build our brand differentiation and lead to better experiences created by increased digitization and improved execution. Digital enablement is our top technology priority. As in the past, we'll actually manage our expenses and take actions when necessary, as we did in the second quarter, so that we can continue to invest and drive revenue growth. And finally, while we're optimistic, we also remain vigilant to possible risks. We're monitoring economic and customer data closely and tightly managing our businesses. Our well-defined risk appetite and our strong risk culture have served us well this year and as we and our customers face the challenges of the pandemic. As we've discussed previously, over the past decade, we fundamentally changed Huntington's enterprise risk management. We now see it as a source of strength for the company as compared to weaknesses during the prior cycle. Our commitment to an aggregate moderate-to-low risk profile continues to be illustrated in this year's DFAST results, which demonstrated superior credit performance for our fifth consecutive DFAST filing. Our underlying portfolio metrics continue to reflect our expectation for credit outperformance through the cycle, including further improvement in the fourth quarter. As a reminder, we reinforced the importance of these risk management standards by requiring the top 1,600 officers of the company to comply with hold-through-retirement restrictions on their equity awards. Our Board, management and colleagues are highly aligned with our shareholders, collectively a top 10 shareholder. I believe this alignment is often underappreciated by The Street, and I personally like to think of these 1,600 colleagues as partners, as owners, aligned and deeply committed because we're locked in. We're long-term shareholders focused on driving sustained long-term financial results. So let me turn it back to Erika. And if she's not on, Mark, maybe you could pick up for her until she joins us.

Erika, can you hear us?

Okay. Just ask the easy questions, Mark.

All right. So Erika emailed me a few of these. Let's get started. So Steve, with the U.S. election behind us and COVID cases continuing to spike globally, can you discuss your view on how the economic recovery will fare as we look out into the next year? And how important do you believe it is that we get another stimulus from Congress to keep the recovery going?

So as we've said, even going back to the second quarter earnings, we saw a recovery, clearly reiterated that in the third quarter outlook and certainly are of that view today. And so we're investing in advance of the recovery this year. We'll continue with that next year, as I discussed. We're very confident in the recovery, but we'll adjust if we need to, should things deteriorate. But news this morning about potential vaccines. The economic activity in our region, I won't repeat it, is very good. And we think this region benefits from a number of things, including reshoring and onshoring of manufacturing and jobs, and the states are well positioned. JobsOhio, which is the economic engine for Ohio, is independent and is fully funded. It's very dynamic in its outreach. So I like the relative position we have here in the Midwest and certainly that which we enjoy as a bank.

All right. Thank you. And Steve, similar theme, economic trends. What are you observing in your Midwest markets? How are these trends evolving? And how does this play out, particularly with the manufacturing sector or other areas that were potentially hard hit within the footprint?

Well, as we saw, auto was closed down for a number of months, and so the auto supply continues to ramp up. Inventories, reflected through floor plan loans with us and others, are seasonally low. And there's just not enough vehicles to meet demand. The same could be said for RV and marine. Those are core businesses for us. And then more broadly, the housing front is very constrained. There's just not enough supply, and we see that through a number of statistics. So there's a robust consumer recovery. And the consumer still is very liquid. So I think we're going to see a good holiday season. I think the news will just keep getting better. And that will -- as supply lines get adjusted -- because I think there is inventory tightness and there will be for some of our retailers and others, both regionally and nationally, as that adjusts, I think we're on an economic recovery. And while it may be uneven in some spots, it will generally strengthen through '21.

All right. Zach, we've got one here for you.

Okay.

Can you talk about your tech priorities beyond the consumer digital initiatives that you speak about frequently?

Sure. Sure, thanks. So technology development has been a major focus for Huntington for some time. I'm getting some echo here. Okay, it's stopped now. So this is not a new phenomenon. We are continuing to accelerate. I think some of the things we're really proud about is the transition to agile development, which is the best-in-class, cross-functional and iterative development process. And we've really nailed that and done that extremely well within the company. And we really -- generally, our priorities have 3 macro focus areas: point-of-sale capabilities to be able to originate products online; secondly, deepening to drive higher levels of engagement, higher levels of primary bank and optimal customer relationships within our customers; and then lastly, process efficiency and servicing. For the last couple of years, there's been 3 big focus areas. One, in our consumer and business banking unit, we've talked a lot about that over time, so I won't go into too much detail there other than to say there's substantial momentum that we're seeing. We've seen the second year in a row of the J.D. Power survey ranking Huntington as the -- as having the top regional banking mobile app and significant customer adoption. Sorry, we're just getting some echo go here, so we're going to try to see if we can figure out how to stop that. And our vehicle finance area has been another key focus area for us, driving digital contracting; digital loan payments; taking cost and friction out of the process; and in treasury, a number of functionalities. As we go forward, the goal is to build on that momentum and drive technology road maps that are just as robust in every one of our businesses, with a particular focus on commercial and our wealth and advisory businesses, and all of this with a mind toward our strategy, which is to become the country's leading people-first, digitally powered bank, with all of our mind toward accelerating revenue as we get into the recovery, as Steve has noted a couple of times in the beginning. Sorry for all these technical issues we're having here.

Erika, did hear you join?

You want to go to the next question, Mark?

Yes. Let's go ahead to the next one. Steve, can you discuss your recent product announcement in consumer and business banking where you extend overdraft to business banking customers and increase the threshold for overdraft to $50. HBAN has been ahead of this trend, dating back to your announcement 10 years ago introducing the 24-Hour Grace product. How do you see the future of overdraft fees evolving in the country?

Well, I don't know how the overdrafts will evolve in the country, but I do think there's a moment in time to be dynamic and to be supportive of consumers. We've chosen to do that in the past, and we've recently done that again with this safety zone that's up to $50 of overdraft, no charge, complementing 24-Hour grace for consumers. We've expanded that as well for small businesses, or businesses generally, but principally to the benefit of small businesses. We're a very large small business lender bank, and this is very, very well received. So we've -- we're getting positive reactions from both sets of customers, and we'd expect that to continue.

All right. Moving on to next question here. Zach, earlier this year, Huntington embarked on an expense management plan expected to generate $75 million of annual savings in '20 and '21, with management suggesting the possibility of reinvesting most all of its '21 savings. Given the moderating revenue backdrop, can you discuss how you're weighing and managing expense levels versus prioritizing investments?

Yes. Thanks, again, Mark, for that question. Look, I think we have been highly focused on disciplined and rigorous expense management for a while. And I would call it a couple of the major actions that we took to drive efficiency in late 2019, in the fourth quarter, and then yet again in the third quarter of this year with substantial expense reduction actions. And the goal of those was to drive efficiency and to generate investment capacity and also to drive record levels of pre -- PPNR and PTPP. So we're doing extremely well on our expense management this year. As we go -- and that will drive us into the -- likely the eighth consecutive year of positive operating leverage into -- in 2020. As we get into a recovery, and as Steve has said, the goal now is to pivot into driving investments that will accelerate revenue growth. And we are -- we've talked for a while about the investment capacity that we've generated as part of our expense reduction programs was there to utilize for investments to the extent that we saw the economic recovery solidifying and strengthening, and that's exactly what we're seeing. And so we're exercising the option now to go back and lean into those investments. And so I think we're bullish about it. We like that expense plan. And we know that over the moderate term, the next 3 to 6 quarters, we're going to start to see revenue accelerating as a result of it.

Zach, I think it's fair to say that we're accelerating our digital investments as a consequence of the pandemic and changing customer preferences. And I'm sure others are, but we're being explicit about it.

All right. It looks like we now have Erika. Good morning, Erika.

Good morning, everybody. Sorry about all the technical difficulties that we've been having. So just to pick up the question here, what has the pandemic taught you so far on what the role digital branches have in the future? And also with 163 of your branches in grocery stores, did you learn anything about the in-store model evolving over time?

Thank you, Erika. There's a very strong echo -- recurring echo off your transmission, just so you're aware. So responding to your question, clearly, we've had a significant digital uptake, and 2/3 of our deposit-related activity come in through mobile deposit or ATM now. So the nature of the branch is continuing to change. Interestingly, our branches in August and September had mid-90% year-over-year comparability in terms of sales activity, and we had good August and Septembers, both last year and this year. So the role is changing. It will continue to evolve. That will provide some level of continued consolidation. We've been doing this regularly every 12 months, essentially, for the last 4 years. And we'll continue to refine our distribution network, but I believe there's a role of the branch. Going forward, it will change. It'll be more outbound oriented. It'll have more consultation, and I think it will also have problem-solving dimensions that will be very important for our customers as well. We think the branches at, at this point, are doing about 25% of their sales in a virtual context. As we continue to upskill and train, that will likely increase. I see that as very, very positive because it keeps a local connection into our customer base. Having said that, I think the investments we've made over the years, these #1 J.D. Powers for mobile 2 years in a row for regional banks reflect capabilities, including training of colleagues. So we have digital champions in all of our branches and a consistent training effort that's been going on now for 2.5 years. So I like how we're positioned. Accelerating further investment will only help us provide even better service. Think of it as sort of end-to-end customer capabilities. The self-service that a lot of us do in different domains these days is coming. In terms of the in-stores, it's still a full service experience. It's an acquisition vehicle for us. We have adjusted some of our in-store branches here in Ohio, including the round that was just recently announced. But we think of that as an important -- because of convenience, an important point of our distribution. However, I would expect there'll be -- as we do with traditionals, we'll continue to rationalize and look for ways to service our customers and to grow but probably through less physical points going forward.

Thank you for that, Steve. Outside of optimizing branches, what would you say is on Huntington's expense contingency list for 2021? Or you see the most opportunity to continue to extract cost savings?