Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, everyone. Huntington Bancshares is here. I'm pleased to have us attend the RBC Capital Markets Financial Institutions Conference. This is a stalwart event for us, and thank you to RBC for hosting. Today, we'll have Zach Wasserman, CFO of Huntington, joined by Scott Kleinman, Co-President of Commercial for Huntington, and we'll turn it over to them to make prepared remarks and facilitate a Q&A at the end of the prepared remarks by Jon Arfstrom. Zach, over to you.

Thank you, Tim, and Good morning, everyone, and thank you to RBC, as Tim said, for hosting us today. We're really pleased to be with you. And also thanks to everyone listening today. I really appreciate your interest in Huntington. As Tim noted, I'm joined today by Scott Kleinman, the Co-President of our Commercial Bank. Before we get started, let's turn to Slide 2. Please review this slide regarding forward-looking statements that I will make today -- [indiscernible] we'll make today. Let me start off with a couple of brief opening remarks related to our strategy and recent initiatives. And then I'm going to turn it over to Scott to make a few comments related to our commercial banking strategy before handing it back to Jon to facilitate Q&A. Starting on Slide 3. At the core of Huntington, we are a purpose-driven company, guided by our mission, and we remain focused on our vision to be the country's leading people-first digitally-powered bank. We believe that purpose drives performance and supports our objective to drive organic growth and to deliver sustainable top quartile financial performance. Slide 4 summarizes the 4 key points I want to cover today. First, we remain confident in our outlook for 2022. This outlook includes driving sustainable revenue growth over the course of the year and capturing cost savings from the TCF acquisition, which are on track for full realization in the second quarter. Additionally, credit continues to perform quite well. Secondly, we are well positioned to benefit from the potential for higher interest rates. As we have demonstrated, we will continue to be dynamic in managing the balance sheet. Third, we continue to evolve our Fair Play product set, where Huntington has been a market leader for over a decade. Fourth and finally, we are executing on our strategic priorities within the commercial bank. Just last week, we announced that we've entered into a definitive agreement to acquire Capstone Partners, which is expected to bolster our capital markets capabilities through the addition of an investment banking and advisory platform. Scott will spend time during his remarks covering the [ substantive ] addition to Huntington. Moving to Slide 5. I'll share a few additional updates. We continue to be deeply focused on growing our pre-provision net revenue, which is supported by our disciplined and proactive approach to expense management. This approach has enabled us to reinvest the net savings to self-fund our revenue-producing initiatives, which we expect to deliver topline returns in the years to come. Additionally, we're continuing to dynamically manage the expense base of the company as we deliver the cost savings from TCF. Recall, in the fourth quarter of 2021, we announced incremental 62 branch consolidations, which totaled 6% of the branch network as well as took other actions related to organizational optimization. We completed those consolidations during February, and the savings are now in the run rate going forward. We're on track to deliver the cost savings from TCF and drive core expenses to the $1 billion level in the second quarter of 2022 as we guided previously. We ended the year with substantial momentum across the bank, including healthy loan pipelines and increased efforts around new business development as we completed the TCF conversion activities. We are carrying that momentum forward as we start this new year with robust loan pipelines, including early-stage pipelines at their highest levels. This reflects the substantial level of calling activity we're seeing from our bankers across the company. We believe the outlook for loan growth remains constructive over the course of 2022. We maintain the same projection of high single-digit percentage growth in loans by Q4 that we had guided to previously. Clearly, we're all watching the recent geopolitical events very closely, which do add some uncertainty and market volatility. However, we continue to see strong client demand supporting new loan production. In addition, the gradual normalization of existing line utilization trends represents a coiled spring that will be additive to loan growth over time, including inventory finance, auto dealer floor plan as well as our general middle market lines. As always, we were dynamic in managing the balance sheet, while being judicious on interest rate risk management in the face of potentially rising rates. During the second half of 2021, we took actions to increase the asset sensitivity of our balance sheet. That posture, coupled with a peer-leading net interest margin, makes Huntington well positioned to earn competitive spread today and benefit as rates move higher. Finally, credit continues to perform exceptionally well. We are pleased with the underlying trends we're seeing with our clients and portfolios, and we expect that to continue. Moving to Slide 6. Let me share a couple of thoughts on our continued Fair Play evolution. Our Fair Play philosophy is at the center of our strategy and is directly aligned with our mission for looking out for people. Huntington has been a leader in this area since 2010 when we launched 24-Hour Grace and quickly followed that with Asterisk Free Checking. We've continued to innovate, adding features such as All Day Deposit, $50 Safety Zone and last year launched 2 new important customer liquidity features in Standby Cash and Early Pay. Over time, we've coupled these features with leading digital capabilities to create one of the most distinctive product sets in the market. We've benefited from this with outsized account growths and higher levels of retention over time. These long-standing Huntington Fair Play features and capabilities are the same ones many others are now building in an attempt to catch up. Nevertheless, we intend to continue our leadership role in this space. And just yesterday, we announced new enhancements for our customers that we'll be implementing during this year. In the second quarter, we expect to launch Instant Access with the capability to provide immediate deposit funds availability to customers up to $500. In July, we expect to roll out a broader refresh of our checking products, which includes a lessening of overdraft fees. Recall, we shared an initial estimate of the net impact of the Fair Play [ product evolution ] during our January earnings call. After finalizing our model, we now expect the net fee reduction to be slightly lower than previously discussed at approximately $14 million per quarter by Q4 with the opportunity for us to see incrementally lower charge-offs as well over time. Importantly, this change is already incorporated to the previous 2022 guidance I provided in January. Over time, we have seen the cumulative effect of Fair Play to be a compelling value proposition for our customers and to support sustainable growth for the bank. While these changes represent a near-term reduction of select fee revenues, we have seen, over time, that prior customer-oriented investments generate positive returns in the form of higher primary bank relationships, increased acquisition and response rates as well as lower customer attrition. The net impact of these changes results in a positive payback over the medium term and is supported by our customer household growth metrics. With those opening remarks, let me pass it to Scott to update on our commercial banking strategy.

Thank you, Zach. Good morning, everyone. Let me pick up on Slide 7. In commercial banking, we go to market with a full service offering, including treasury management and capital markets capabilities. These offerings range from our middle market, all the way up market to corporate banking and our specialty commercial banking groups. The commercial bank was bolstered through the addition of TCF, especially within equipment finance, inventory finance, commercial real estate and middle market banking. Now, with over $60 billion of total commercial loan balances across the bank, we have a substantial opportunity in front of us, especially given the addition of new and expanded growth markets. For today's discussion, I wanted to spend a moment highlighting our capital markets business at Huntington. As you can see, capital markets is one of our key strategic priorities within the commercial bank. And we are positioned to substantially bolster our existing capabilities with the planned acquisition of Capstone Partners, which we announced last week. Before I go there, let me pause on Slide 8, which summarizes our capital markets business. Huntington Capital Markets was established as a brand in 2016, and I have had the honor of leading this business prior to my current role with the bank. The team is comprised of colleagues with expertise in their focus areas and represents a growth business with tremendous opportunity. Over the last 4 years, we have increased capital markets revenues by over $60 million annually, representing a 14% annual growth rate since that time. This was the direct result of a targeted and strategic plan to expand the business, including the addition of key capabilities such as private placement, institutional banking, corporate finance and foreign exchange. This success has been driven both by our ability to recruit from larger institutions to add to our expertise and capabilities, and through bolt-on acquisitions, such as HSE, which we completed in 2018, which added municipal finance and underwriting. While we have assembled a collection of comprehensive solutions, the advisory and M&A capability was a missing link in order to fully serve our middle market customers, especially from an ownership transition perspective. The addition of Capstone Partners will provide us not only with capabilities to fill in that customer solution, it will also bring us a leadership team with the vision and ability to build upon their 20-year track record of success to continue to accelerate our growth outlook. Turning to Slide 9. Let me introduce Capstone Partners and why they are such a compelling fit for Huntington. Through the acquisition, we will gain one of the top independent middle market investment banking and advisory firms. The team includes nearly 200 colleagues who operate nationally and are focused on 12 dedicated industry groups. They have been recognized numerous times by multiple firms as Middle Market Investment Bank of the Year and their transaction counts put them in the top tier of middle market investment banks. Importantly, we share a closely aligned vision for the acceleration of the business under Huntington and have similar cultures focused on our colleagues, clients and communities. We have known the firm and its leadership in market for many years. With 3-year average revenues of $96 million, Capstone would increase our capital markets revenues by over 60% and create a platform for accelerated growth and expansion in the future. When we deliver Capstone's expertise, scale and capabilities to Huntington's customers, we expect to see significant revenue synergy opportunities. We see these synergies emerging through leveraging Huntington's strength in the Midwest to expand Capstone's reach as well as growing our specialty banking verticals by utilizing Capstone's recognized industry expertise. Additionally, as you can see on the right-hand side of the slide, the targeted industry expertise complements many of our key specializations, including industrials, healthcare and tech and telecom. We are also excited to leverage key commercial portfolios where we have substantive commercial customers and balances and where Capstone's expertise is additive to our existing business. Finally, we are pleased to be able to add incremental sector expertise in new areas such as aerospace and defense as well as energy and power. In closing, we are excited about adding Capstone and welcoming our new colleagues joining Huntington. We also look forward to the expanded capabilities and expertise we can bring our commercial customers as we execute on our commercial banking strategic priorities. With those opening remarks, let me turn it over to Jon to open the Q&A session.

All right, guys. Can you hear me all right?

Yes, Jon.

Okay. Good. I apologize for the change there. Scott or Zach, can you talk about an update on the environment for the trends that you're seeing for loan growth? And this fourth quarter momentum, is that continuing into the first quarter?

Sure. This is Zach. I'll take that one. So it's still too early to call for the total totality of Q1, but we really like what we're seeing. Notwithstanding the geopolitical events around the world that we're watching really carefully, on the ground, what we're seeing from our clients right now continues to be strong demand and the expectation of continued economic growth and continued growth for their own businesses. And it's really supported by our views on the trends we're seeing and continued strength in new loan production and pipelines, both significantly higher year-on-year, but also really encouragingly continuing to build at the early stages of that pipelines that continues to signal for us solid growth over the course of 2022 and gives us that confidence in achieving the high single-digit loan growth by Q4 that I mentioned in my remarks. And the form of it is very similar to what we've been seeing over the last several quarters. It's commercially led in large part and driven by new production although. It had been around the same kind of areas we've been seeing before, our mid-corporate business, our specialty verticals that Scott referenced in some of his remarks. Inventory and equipment finance continues to be very strong, I think, supported by the investment into property, plant and equipment that's happening throughout the U.S. economy now. I would say I'm also really heartened and pleased to see sustained demand on the consumer side. Our auto and RV Marine business continues to grow very well, and we are seeing continued growth in our on-sheet mortgage -- residential mortgage business. From a line utilization perspective, as I noted before, we're really not counting on a lot of growth in 2022 at this point in our budget. And in the guidance that I provided, only roughly 1% of that high single-digit loan growth is from assumed improvement in line utilization. But what we're seeing so far is encouraging thus far in Q1. It does appear from the trends we saw in the late part of 2021 and what we're seeing in early 2022 that we have bottomed in the third quarter of last year, and we're seeing flat to higher line utilization, which I think will be constructive and represent a potential opportunity for us as we see some of that $5 billion of lower than pre-pandemic line utilization over time normalized return.

Okay. Good. That's very helpful. I also see in your comments, you talked about a lot of this is driven by calling activity, so that's nice as well that your bankers are getting out there in the field. As you think through revenues and synergies on TCF, it sounds like you're fairly positive on some of the net interest income potential. But what kind of loan and other fee growth synergnies are you seeing emerge from the merger?

Yes. I mean we talked about this a little bit over time, but we are really excited about it. As we got through the fourth quarter and turned the attention of the entire organization from a really excellently managed conversion of the TCF customer base onto the Huntington platform in early fourth quarter, we're able to pivot that and really get going on executing the revenue synergy opportunities throughout the balance of the fourth quarter, and that continues into this year. And I can tell you on the loan side, examples of that are, we're expanding into the new growth markets that we added to the Huntington portfolio as part of this acquisition. The Twin Cities, Denver represent very significant growth opportunities across the consumer base, our middle market and business banking divisions as well as the larger corporate customers that we can acquire and deepen our relationship in those markets. We've also gained a much more substantial presence in Chicago. And so we are actively building the banker teams, hiring staff and beginning to win new clients in those geographies. We touched on a little bit before, but just to reinforce it, there's also a really significant benefit that we can have from now the combined size of our inventory and equipment finance business. We're the seventh largest bank-owned national player at this point in that business, and we're seeing very significant opportunities now to harness that combined scale and serve our clients in a more -- even more complete way from that perspective. On the consumer mortgage side, penetrating the Minnesota and Colorado opportunities, particularly Colorado, that's growing very, very quickly now. as you likely know, represent a really substantial opportunity to grow and continue to support consumer mortgage loan origination. And then on the fee business side, we're really excited about a couple of things, and one in particular is wealth management. Within our Huntington core growth strategy, we've been focused on building our wealth and advisory business for a long time. The introduction of the new markets for us to grow into, like Minnesota, like the Twin Cities like Denver represent really significant opportunities that we are already building the teams and getting client wins around. And that's not even to mention Capstone, which we just announced, but I think represents yet another really terrific opportunity to capture new revenue growth for us over the course of the next couple of years.

Okay. I do want to touch on Capstone, but let's touch on expenses for a sec. You've got some good line of sight on the TCF synergies and I think we understand your guidance for Q1 and then the first half of '22. Talk a little bit about how you're balancing investments in the business against trying to hold these efficiencies in place. And then talk a little bit about how we should think through the Capstone addition to the expense base.

Sure. I think as we've talked about before, we're really pleased with the trajectory of our expenses coming down into the second quarter. And at that point, we'll hit a floor and get back to kind of a more normalized environment, where our prime objective is to drive sustained and accelerating PPNR and to do so at a return on capital that's at the top quartile of our peer group. So it starts first with revenue growth. where we were talking about the strategies and the opportunities just now, but also our commitment to positive operating leverage. And I think in that, which, just to come back to your question, it's really about 3 things, dynamically managing and driving efficiencies in the core run rate expense base of the business so that we can have the capacity to invest in our new growth initiatives while staying true overall to positive operating leverage and managing overall expense rate growth, slower than the growth rate of revenue. And at this point, we've got strong line of sight to be able to do that over the course of our long-range plan, continuing to drive efficiencies in the base, fuel investments and achieve positive operating leverage, which will ultimately be the key to that PPNR. We're still working through the precision and the outlook around the impact that Capstone will have. So not prepared to give specific guidance on that now, but certainly over the course of the next several investor communications opportunities, we'll provide more guidance to that incrementally as we continue to get closer to the close, which is expected to be in the second quarter of this year.

Okay. Okay. That's fair. Scott, maybe a question for you. Talk about what you think is possible from Capstone? Are your borrowers asking for this? And then how do you integrate the 2 with your commercial lending businesses and make sure people are cooperating and sharing?

Yes. So appreciate the question. At Huntington, when we think about our clients, we've had, Jon, over 110 exits in the last 3 years. And as you know, we have a long history of providing debt products to clients and banking services, but this has been an identified gap for us in our product set for some time. So we set out several years ago to close the gap, and we built a series of partnerships. Capstone was one of those partners. So we got to know them not only through reputation, but also by how they work directly with our clients across our footprint. So this kind of transaction for us was almost a natural extension as we realized how aligned we were. Now I think, Jon, one of the benefits we have about being a little bit later in this process, obviously, many of our peers have the capability, is we've gotten to understand what works when you're integrating and what doesn't. So we're going to be very thoughtful about it. But again, we've been working together almost 2 years. So we're very comfortable that we're going to be able to build those bridges and leverage their insights into our client base. Our bankers have a familiarity with them in many cases. So that just adds to our overall comfort. And Jon, we're really excited about closing this gap and surrounding our middle market clients really with the strategic advice they need throughout their business life cycle.

Okay. Good. That's helpful. Zach, maybe a question for you on asset sensitivity. It's very topical, obviously, and you use the term in your deck, biased to capture the upside benefit. And I'm just curious how you're feeling about it today. Is it possible that you guys could migrate to the higher end of your NII guide range? What would have to happen for you to achieve that?

Yes. It's a good question, Jon. Thank you. Over the last 3 quarters, as we've talked about in a number of forums, we've taken conscious action to increase the asset sensitivity of the balance sheet, up from below 3% in the middle of last year to above 4% by the end of 2021. And we really like that posture and that position. It allows us to benefit as rates rise and, as I said, support that peer-leading net interest margin. At the same time, we'll continue to be dynamic and evaluate options to protect our downside and to lock in the benefits of higher rates when they manifest over time. I think relative to your question about potential to achieve the high end of the high single-digits to low double-digits NII dollar guidance, look, I think it's going to come down to loan growth and spread, not surprisingly. I think on the loan growth side, we're very confident in achieving that growth, driven by production. And as I mentioned earlier, utilization improvement could represent an even larger upside there. I think on the NIM side, when we set our budget, we were expecting between 3 and 4 Fed rate hikes. It's a volatile market, clearly here. But I think if you look at the current yield curve, it's around 6 or maybe even more. So clearly, there's an expectation of additional interest rate increases this year in 2022, which we should benefit from, and will be constructive to NIM. So those would be the drivers for us to achieve that higher end.

Okay. Good. Fair enough. I know we're at the time, but due to my technological inadequacies. I just want to ask a couple -- one more question, if I could. What do you think we're going to be talking about in a year, Zach? I mean it feels like things are going very well. You started in late 2019 as CFO. You've seen a lot. It feels like we're getting back to normal other than the Eastern European issues, but what do you think we're going to be talking about a year from now?

Look, I think for Huntington, there's a really important objective that we've got, which is to achieve our medium-term financial targets that we set as part of the TCF acquisition by the second half of this year. And so I think as we're talking a year from now, we'll be talking about how that was achieved. And then what's our next stage of financial objectives and how are we going to create an aspirational plan and how we will achieve that growth and that return that I talked about before. So certainly, that will be one part. I think another part, undoubtedly, will be how we're positioned aroud the next leg of yield curve expectations, how did we manage through the deposit beta cycle and how are we positioning the benefit from what could be a dynamic interest rate environment thereafter, so undoubtedly that would be a part of it as well. And lastly, I think we'll come back and talk about strategy. The industry continues to go through a significant amount of change, and we think we're on the front foot and will remain on the offense. And so I think talking about where our strategic growth focuses are, how we'll leverage our competitive strength and what that next leg of strategic focus areas will be for us [indiscernible].

Okay. Very helpful, guys. I really appreciate the time, and good luck today with the rest of the meetings.

All right. Thanks, Jon. We appreciate it.

Thank you.