Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

I'm [ Matt Kessler ], and I cover U.S. large-cap bank stocks here at Barclays on Jason Goldberg's team. Welcome to the 20th Annual Global Financial Conference. Next up, we are pleased to welcome back Huntington Bancshares. From the company, we have Zach Wasserman, Chief Financial Officer. With that, I'll hand it off to Zach for some prepared remarks followed by Q&A.

Good morning, and thanks, Matthew, and thank you to Barclays for hosting us today. I want to start by welcoming everyone listening and in the room today. We really appreciate your interest in Huntington. This morning, I will start by sharing a few insights into what we're seeing so far this quarter. I'll also provide several updates to the 2022 financial guidance that we've provided in the past. Then I'll turn it back over to Matt for questions and answers. Before I start, I will remind you that my remarks, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time, and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings. To begin my prepared remarks, we are seeing significant momentum in the business right now, and we're executing well on our strategic plan. We have driven robust financial performance in the first half of the year, and we expect these strong trends to continue into the second half of the year. We remain intently focused on delivering profitable growth and growing our pre-provision net revenue. We're delivering sustained organic growth in our core businesses and benefiting from additional growth opportunities from last year's TCF acquisition. After having fully delivered the cost synergies in the second quarter, we have a powerful call to action throughout the bank for our teams now to go to market as one Huntington and deliver the revenue synergies. Overall, the business continues to perform very well with expanding profitability. On the ground, notwithstanding the backdrop of high inflation, rising rates and geopolitical factors, the sentiment across our commercial and consumer customer bases remains generally positive, and we continue to see demand for loans. That said, we, along with our customers, are conscious of the uncertainty in the near-term economic outlook. We're closely monitoring the ever-changing economic landscape and remain focused on being well prepared to manage through whatever scenario ultimately plays out. Moving on to loans, we remain on track for our outlook of high single-digit loan growth rate on a year-over-year basis in Q4. The first half of the year and quarter-to-date thus far in Q3 have been at or exceeding this level of growth. We're leveraging that momentum to take the opportunity to optimize asset growth at the margin to maximize returns. We believe our sustained loan growth reflects the power of the Huntington franchise as well as the incremental teams and expertise we have added to support our strategic plan. As for deposits, through the end of August, we are seeing the modest average deposit growth, to which we had guided on our second quarter earnings call. And we expect this to be the result for the full Q3. We remain focused on executing deposit growth initiatives, especially in commercial, while maintaining deposit pricing discipline. In Consumer, we've seen new customer acquisition rates support balances and offset some of the impact of the continued normalization in consumer balances from the elevated COVID period levels. On deposit pricing, we're remaining dynamic in the environment and are managing the portfolio at a granular and segmented level. This is being accomplished client-by-client in many cases with a concerted focus on deepening engagement with our customers and growing the primary bank relationships to bring lower-cost operational deposits. Deposit betas, thus far, have risen slower than expected. This, coupled with the solid loan yield expansion and our asset sensitivity, is supporting NIM expansion above prior expectations. We continue to forecast deposit betas through the entirety of the cycle at a level similar to the last rate cycle. Given the sustained balance sheet growth and NIM trends, we're revising upward our net interest income guidance. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion to grow in the range of the low to mid-20s percent growth rate by Q4. This is above our previous guidance of high-teens to low-20s percentage growth. Additionally, strategic areas of focus for fee income continued to perform well, including our payments, capital markets and wealth management businesses. Capital Markets has especially performed well and is exceeding our expectations, both in the core and the newly acquired Capstone advisory business, where their activity is exceeding expectations and the integration is proceeding at a great pace. Overall, we continue to see fee income in Q4 coming in within the previous guided range of low to mid-single-digit growth. On expenses, we remain focused on rigorous expense management while maintaining critical investments to fuel our growth strategies. Core expenses continued to be well controlled. Given the increased outlook for 2022 revenue and earnings and the continued solid loan, deposit and fee production levels, we are seeing some additional associated compensation expenses in the year. A portion of these will show up in Q3. We now forecast core expenses for the third quarter, including the full quarter run rate operating costs of Capstone and Torana and excluding notable items, to be approximately $1.04 billion in Q3. The final Q3 quarterly expense amount could be a few million higher or lower than that figure, depending on how fee-related businesses do in September. Moving on to credit, our portfolios are performing exceptionally well with low charge-offs and stable credit outlooks. We are not experiencing degradation and credit trends are stable. Even as we closely monitor the evolving macroeconomic uncertainty, we continue to see strength of our borrowers as we work through portfolio management reviews. Our expectation for the full year 2022 net charge-offs remains consistent with our previous guidance of less than 15 basis points. Recall, Huntington has a long-standing disciplined approach to credit, along with our aggregate moderate to low risk appetite through the cycle. We believe this risk management rigor, coupled with disciplined client selection and strong credit reserve position, position us very well for the economic environment as it moves through 2023. On the topic of capital, our priorities remain unchanged, with our first priority to fund organic loan growth. With the robust return on equity we are generating from the core business, we're pleased to focus our capital deployment to support organic growth. We expect buybacks in the near term to be de minimis. Our common equity Tier 1 capital ratio is expected to trend toward the midpoint of our 9% to 10% operating range over the balance of 2022. In closing, we're focused on balancing continued momentum in the business and strong revenue growth with the uncertainty around the near-term macro outlook and inflationary pressures that are affecting the economy. We remain committed to making investments in talent and technology across our businesses to expand our products, capabilities and expertise. We have a clearly defined credit risk management framework and a disciplined, dynamic approach to managing the various risks we encounter. The continued investment in our business, coupled with our robust risk management framework and strong expense discipline position us well to keep delivering consistent, sustainable and long-term performance for our shareholders. We have a highly prioritized strategic plan, an outstanding team and a proven track record of successful execution. I'd also like to remind everyone that we announced our upcoming Investor Day a couple of weeks ago, which we will host on Thursday, November 10 here in New York City at The Westin. We hope many of you will be able to join us for that event, as we share more details on our strategic priorities at Huntington, along with some of our long-term financial targets. With those opening remarks, let me turn it over to Matthew to open up the Q&A session.

Thanks, Zach. I appreciate the update on the guidance. I just want to go over it one more time. So average loans exceeding or at your previous guidance. NII up better than your previous guidance. Fee income coming in strong, but still guiding to low to mid-single digits -- and expenses, you're targeting $1.04 billion by 4Q...

In the third quarter, Matthew, not including modest growth as we go forward throughout the rest of this year.

Alright, great, thank you for that. Why don't we jump to the first ARS question, we've been asking each bank the same question throughout our conference. What is your current position in shares of HBAN: one, overweight; two, marketweight; three, underweight; four, not Involved. Looks like most not involved, hopefully, we can get people involved during this presentation. Why don't we jump to the second one, HBAN's current medium-term ROTCE target is 17% plus to 20.6% core in 2Q. As upcoming Investor Day in November, where do you see HBAN's ROTCE target going to? No change. 18% plus is the next highest --good information. So you talked about --you just announced an upcoming Investor Day in November, any hints on what we should expect there? And will you revise your targets?

So really excited about the Investor Day. Hopefully, many of you will be able to join, as I noted before. It will be an opportunity for us to go deeper into our strategic priorities that we've got that are guiding the company, both now but over the foreseeable future as well. We'll put a big focus on highlighting the momentum and the track record of delivering on those strategies already, and then what the vision is to continue to execute on them over the next 3 to 5 years. I do expect that we'll also share updated financial long-term targets at that time as well.

Great. You spoke about in your prepared remarks how the economy is strong and loan growth is at or exceeding expectations. Can you just talk about the overall health of the economy and the impacts of inflation.

Yes, I mean I think we're clearly watching like all of you, the trends in the economic environment, the path of inflation, the likely path of interest rates, including the scenarios around the forward yield curve and what's happening with geopolitical factors and other. So certainly, lots for us to think through and be able to manage through whatever contingency unfolds and the scenario plays out. With that being said, what we're seeing on the ground right now is actually considerably more positive than the headlines would illustrate. And broadly speaking, our commercial clients are --continue to see demand for their products and revenue opportunities in front of them. They're managing their own profitability fairly well and therefore, being in a solid position to manage through and consumers likewise continue to be trending fairly positively. So it's certainly a moment of waiting and watching, but on the ground right now, we're seeing growth.

You touched on your loan growth in the prepared remarks. I guess, can you talk about what areas you're seeing growth in?

Sure. Yes. On loan growth, we continue, as I noted, to expect high single-digit growth rate by Q4, and we're kind of trending at or above that level right now. So it's really positive. It's largely commercial-led, similar to the kind of growth profile that we've seen with Huntington for the first three quarters of this year, driven by new production, both acquiring new commercial clients and deepening relationships within existing clients. Very broad-based, I would say, across the entirety of the middle market and mid-corporate space, certainly, the vertical specializations we have in technology, telecom, industrials and others are really supporting that. We're also --what's interesting is, in addition to the general continued strength in our commercial clients and -- they're investing in inventory, they're investing in satisfying demand in the near term -- there's a longer-term growth dynamic that is also, I think, shaping our loan growth, which is corporations investing in automation, technology and other property, plant and equipment to modernize their infrastructure and to some degree, deal with labor constraints in the economy. And I think that's a longer-term secular trend that we're really poised to benefit from, particularly in our asset and equipment finance business, coming together with TCF, we brought together two very powerful asset and equipment finance businesses, which now in Q3 represent the #5 sized bank-owned asset and equipment finance business or platform, so I think that really stands to benefit there. On the consumer side, pretty steady. I think we'll see some additional growth in on-sheet residential mortgage from purchase activity that was occurring more in the second quarter. So broadly speaking, commercial led.

And how are you guys thinking about lending into a slower economic environment or a recession?

For us, it's about being consistent to our discipline of aggregate moderate to low through-the-cycle risk appetite in a very strong focus on client selection -- finding great clients with whom will have deep long-standing relationships -- and so it's that consistency of focus, I think, that we really lean on at times like this to make sure that we're growing in ways that are really safe and are likely to generate long-term returns, which is our expectation.

That's helpful. And you touched on this in your prepared remarks also that you're seeing modest deposit growth. What's differentiating HBAN deposit gathering strategy compared to its peers?

Thanks for that question. We're really encouraged by the continued strength we've seen in deposit gathering, and we came into this year expecting to grow deposits modestly. We reiterated that guidance at the Q2 earnings call for Q3, and we're delivering on it. And it's really commercial led. We're seeing a --the focus on gathering primary bank relationships and operating accounts really sort of fuel and satisfy that client base and drive that deposit growth. It's difficult for me to differentiate and compare and contrast to other firms, but I think part of it is likely that during 2020 and 2021, when there was so much liquidity coming through on the commercial side, we did not put a focus on gathering non-operational deposit accounts, whereas others perhaps gather those at a higher rate. And so there's just less of that flowing out of Huntington and therefore, our underlying client acquisition and deepening activities are really driving that net modest growth.

And then what are you seeing in terms of your deposit beta? Have you seen a tick up into 3Q?

Thus far, we've seen deposit betas trend slower and lower than we were expecting, which I think is fueling another quarter of significant NIM expansion and profitability expansion here in the third quarter. We're going to market in a very disciplined, very detailed management approach that is solely focused on primary bank and operating accounts. So when we do provide incremental rates to customers, it's accompanied by growing our strong relationship with them, which on a net basis helps us to keep the deposit costs low. So we are seeing the trend really favorably right now. I would highlight that over the course of the entirety of the cycle, we are still planning that we'll see a deposit beta similar to the last cycle, and so that will imply rising betas over the course of the next several quarters. But as right now, it's exceptionally well managed.

How are you thinking about balance sheet management and asset sensitivity in this uncertain environment?

Late last year, in the second half of '21, we took a series of steps to consciously increase the asset sensitivity of the company and to position us to benefit from the higher rates that were expected to come through the system in 2022 and 2023, and we're seeing that with very meaningful spread expansion and as manifested by the guidance increase I just gave a few minutes ago. As we came into this year, we knew that if you look at history, it would tell you that medium- to long-term interest rates tend to peak and begin to fall at the same time as the Fed is completing its hiking cycle. And so that would tell you that you'd want to start to put on downside hedge protection, downside interest rate risk management approaches on a slow and steady basis leading up to that expected peak of the Fed hiking cycle. So that's what we've been doing during 2022, gradually and slowly adding to downside hedge protection throughout the course of the first half of the year. We continued that program in the first 2 months of the third quarter, and I would expect us over time to continue to do that as we get toward the expected peak of the hiking cycle. But on a net basis, still very asset sensitive, still very much poised to benefit as rates continue to go higher.

In 2Q, you guys saw a nice pickup in your NIM. It sounds like 3Q, you're going to have another good pickup. What is the trajectory of your NIM and what is your outlook?

Yes, it's really a very encouraging spread expansion. We saw 28 basis points of NIM expansion in Q2. We'll see another quarter of expansion to Q3. I expect it to continue to expand from there. Our focus is really on growing net interest income on a dollar basis sequentially and continue to drive pre-provision net revenues and profitability higher. And that's really what underlies the guidance I gave of now lifting that growth rate range for NII on a dollar basis to the low-20s to mid-20% range by Q4.

Helpful. Helpful. Moving on to fee income. Can you touch on the dynamics you're seeing in your business lines such as mortgage and capital markets?

Sure. In fees, we've got three key areas of strategic growth that manifest themselves in fees, payments, capital markets and wealth management, all of them doing very well, and we're really encouraged by what we're seeing in all three of those businesses. Capital markets, in particular, is doing quite well, both in the organic core and in the acquired Capstone Advisory business doing really well and seeing above-expected performance in both of those lines. So we're seeing nice tailwind in performance in those strategic areas. Our SBA loan production business is also another important source of fee revenues and is doing quite well as we grow that business loan production at double digits expanded to the TCF geographies. And over time, that will give us the opportunity to not only drive fees, but over time as well, hold some of those assets on sheet and support with a really great NIM and great use of capital. Mortgage is clearly the pressure point in fees. We're seeing volume growth very similar to what the industry overall is seeing, and so I do expect that to be an incremental pressure on revenues for the next several quarters until it sort of reaches a stabilization point. With that being said, net-net, I still do expect to grow fees in the fourth quarter, and as I said, between low to mid-single digits as we get towards the end of the year.

Can you tell us more about Huntington ChoicePay, how it fits into your broader payment strategy?

Sure. Within payments, this is an area of significant strategic growth focus for us. Just last quarter, we established enterprise payments division to really harness and accelerate the growth in payments broadly. Historically, there were 2 main revenue drivers of payments for Huntington: our card business -- our debit and credit business -- which has really been a solid performer over time, and our treasury management business, which has tons of room to grow and just continue to penetrate in our commercial client base. Torana, which we've now rebranded within Huntington to be ChoicePay, is a new third leg of that stool to really drive revenue growth. The capability is a business-to-consumer payment disbursement platform where we can offer to our commercial clients the functionality to distribute payments out to their end customers in a way that's really seamless, that's digital and really very much enhances the customer experience. The first use cases for that within our business is in our legal claims settlement business within the Commercial division. But over time, there's an opportunity to expand that to other industry verticals like insurance, health care, education, government and many others. So we're really very optimistic about where that's going to go over time.

Helpful. And, you talked about it earlier, so now the TCF synergies are now fully in the expense run rate. How are you guys approaching the 2023 budgeting process thinking about expense growth going forward?

Now that we've fully delivered the TCF cost synergies, we're back into a business-as-usual mode for managing expenses where we're really guided by our commitment to positive operating leverage, growing expenses less than the growth rate of revenue and expanding margins and profitability. As we stand right now, we're managing with a high degree of vigilance and really very judicious on expenses, cognizant of the economic environment, and we just really want to make sure that the business is positioned well. Even as we self-fund critical investments in technology and talent to support our strategic priorities, we are seeing, as I mentioned in my prepared remarks, a bit of incremental comp come through the system, just given how strong 2022 has been, and so we'll see some of that impact. But the underlying growth rate and the ethos at this point is for very well disciplined and modest growth. And I would expect that even if we haven't set our budgets or guidance for 2023, our current posture is continuing to run with a very disciplined and low level of expense growth for the time being.

It doesn't sound like you're restarting your buyback in 3Q. What would cause you to restart it looking out?

Yes. In terms of our capital priorities, they really haven't changed, and it's first and foremost to support organic growth. So that's where we're trying to focus on deploying our incremental capital as we move forward here for the balance of this year and allowing our CET1 ratio to move higher up into the middle of the target operating range by the end of the year. So between the 9% to 10% target operating range here by Q4. So I do expect share buybacks to be de minimis, if any, in the third and fourth quarter given those strategies.

Fair. I think it's probably a good time to go to the third ARS question, if we can pull on the screen. Given HBAN's success with the TCF acquisition, once the operating environment stabilizes, with this excess capital, it should focus on: 1 - Additional larger bank acquisitions; 2 - Smaller fill-in acquisitions, 3 - Non-bank acquisitions, like Capstone, Torana: 4 - Dividend increase; 5 - Share repurchase. 3 - Non-bank acquisitions. So I guess, looking at larger bank acquisitions, is that still on the table after the TCF deal?

We are intently focused on growing our core. We have so many opportunities in front of us to grow the organic business. So that's the focus for us for now. I do think that bolt-on --smaller bolt-on acquisitions like Capstone and Torana could be really helpful over time to add capabilities, to add new customer channels, to add new services. So we may see some more of that over time. But I think, broadly speaking, we're really focused on the core and growing our organic business.

In terms of bolt-on acquisitions, what areas are you guys looking at?

I think there are interesting companies that could be additive to us sort of across the spectrum of our business lines, including consumer and business banking, but probably the most notable places where there's clear opportunities is in the commercial business like capital markets, like special asset generation capabilities or in the payment space.

Helpful. How are you thinking about revenue synergies across your business from the TCF deal? Are you already seeing the benefit?

Really excited about the revenue synergy opportunities that have come to us from TCF. They are already contributing, but it's still early days as well, and there's lots more to come. I'll share a couple of examples of them. One that we are really pleased about is bringing the consumer product set of Huntington and the consumer operating model, including branch productivity and channel effectiveness to the acquired TCF base. We're seeing a lot of nice lift now in customer and household acquisition on the consumer side and deepening of accounts there. Business banking, we're beginning to --already to roll out and build business banking and SBA production offices in the TCF geographies, which are really fueling some of the fee growth I mentioned earlier. Growing the commercial business, really bringing the mid-market and mid-corporate capabilities of Huntington to the TCF acquired geographies like the Twin Cities, like Chicago, where we were present before, but at a smaller scale, much bigger scale now in Chicago and then Denver, which is just an exceptional growth market for us -- there's a lot of opportunity there. Wealth management is another one. We've been building out actively wealth management practices now in the Twin Cities, in Denver, increasing in Chicago. I think the Twin Cities now is already in the top wealth management regions for Huntington after it didn't even exist a year ago. And so lots of opportunity there. Last one I would highlight is, and I think I mentioned this a little bit before, bringing together the asset and equipment finance business of TCF and Huntington into one combined unit has been incredibly powerful in terms of going to market now with a much broader offering with a very strong market position and brand really poises us to capitalize on that long-term secular trend of corporations investing in their automation and their own technology. So we're early days. I expect to share a lot more guidance and clarity around where we're going over time as we continue to gain momentum and experience, but we're really encouraged by what we're seeing thus far.

Helpful, helpful. Let's move to asset quality. If we go to the fourth ARS question. Where do you see HBAN's NCO ratio in 2023? It's targeting sub 15 basis points for 2022. 2, so up slightly, 15 to 25 basis points and 25 to 30 basis points. I guess how -- are you seeing any normalization NCO or DQ trends quarter-to-date?

The credit quality of the portfolio is exceptional, really seeing a lot of stability. We're watching it very, very intently and vigilantly doing very detailed portfolio reviews, but everything we're seeing at this point continues to point toward the strength of our corporate clients. And I think it's sort of indicative and really underscores the long-term commitment that we've had toward rigorous risk management and client selection and really with the risk manager framework of aggregate moderate to low risk that positions us well to weather through the entirety of the cycle, including now. So really quite positive signs that we're seeing right now, which underlies our expectation of charge-offs being less than 15 basis points for the full year of 2022. Clearly, they'll be higher in the second half of the year than they were in the first half of the year, record low net charge-offs in both Q1 and Q2, but I think still at a level that's well south of our long-term target range. And again, very indicative of portfolio quality at this point.

Are there any areas you're watching closely?

We're, of course, watching certain areas that could be affected by the current economic environment, like, for example, central business district, commercial real estate -- a very small percentage of the portfolio -- long-term care facilities where reimbursement rates have not kept pace with the cost of inflation drivers in the business and so profitability is under pressure. Those are some of the areas, some specialty lines within the commercial business more broadly. With that being said, everything we're seeing right now is pointing to strength and stability. And I would note that at 1.85%, our ACL reserve coverage level is one of the highest in the peer group. So it leaves us in a very strong position to kind of weather through whatever scenario ultimately unfolds here.

Helpful, helpful. There's some time left, does audience have any questions?

Thanks for your time today. Just curious on any behavior that you're seeing in the home equity book. Anything there that, kind of, is a little bit different than the first half of the year.

Yes. Thanks for the questions around home equity and what we're seeing in trends there. And I think generally, we're seeing higher demand for new home equity, not surprising, given the increase in home prices and the amount of equity that's been generated throughout the economy. And a bit of tick up of line utilization, but not much, pretty stable, I would say. Generally speaking, it will be a nice opportunity for incremental asset generation at the margin, but not overly much and the trends within the portfolio are pretty stable. Thanks for the question. Good one.

A bit about how you plan to reduce the asset sensitivity of the balance sheet going forward. Can you talk to what your intention is about the stability of margin in out years? How much persistency is that margin level you expect to achieve?

Yes, it's a great question. Really, maintaining the benefit of this higher level of NIM and how we're going to manage that is a critical area of focus, so thank you for the question. Look, I think our view is, we are poised to benefit quite a bit as rates continue, and as they sustained at a high level. And so wanting to make sure that we can protect that and to lock in a lot of that benefit, even as we stay net asset sensitive in the near term. So I think as we continue on over the course --we've completed perhaps 50% to 60% of what could be a total program, so there's still a lot more to go of the hedging program. I think we'll continue to gradually add to that even as we're watching the pace and trajectory of interest rates, and it's certainly possible that they might go above the current level. So I think it's, in our view, prudent to do this program slowly and with consistency. Ultimately, with a view toward coloring in as much of the NIM benefit as we can out into '23, '24 and '25. So, it's a major focus, and I think finding the way to maximize that opportunity set is, suffice it to say, daily focus for us now.

Anyone else? I've got one more question. Is it tougher to become -- to differentiate yourself now that a lot of your competitors are introducing similar fair play practices?

I would say it's really not. I mean the strength of the Huntington brand and differentiation is always at its core a function of the service model that we've got and the really outstanding levels of client service that we can provide in all of our channels. The products, of course, play into that and the product features of them, and you will see us continue to launch new products and new features over time. But at its heart, the strength of the brand is around that service culture, which I don't think is easily replicated just with the stroke of the print, the pen, of a new product from one of our competitors. The other thing I would tell you is, we're putting a huge focus on digital. We've talked about that a lot, that's probably not surprising. But that, in the end is, I think, going forward, a new source of differentiation for Huntington, the ease with which our customers can interact with us, the ability for us to deepen those relationships, particularly digitally acquired accounts, we can deepen their relationship with bigger deposits, we can find ways to service them with additional products -- that is an emerging source of differentiation. And I think given the strength we have in digital, 4 years in a row, J.D. Power winning digital properties in our footprint, I think that's the way we'll compete going forward.

And then you've announced a few fair play enhancements. Can you just talk about those quickly and how that affects the run rate?

Sure. We announced earlier this year a series of pricing changes throughout our checking portfolio, including reducing overdrafts and NSF fees down to lower levels --$15 -- and a number of other pricing changes, the net of which was going to result in about a $12 million fee reduction by the fourth quarter, and we're continuing to be on track for that amount. So those changes have been rolled out in the success of a series of releases and everything seems to be proceeding well.

Great. Great. And with that, let's thank Zach and HBAN. Really appreciate the time.

Thank you, Matthew. Thanks, everybody.