Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, everyone. Our next fireside chat is with Huntington. with my friends Zach. CFO, Zach Wasserman, he's going to give a little bit of prepared comments, and then we'll get into some Q&A. And as always, we're open for business on questions from the crowd, I actually prefer that. But we do have many questions for Zach. So why don't you go ahead and kick it Zach?

Appreciate that. and thank you. Thanks to RBC for hosting us today. I want to welcome everyone, and we appreciate your interest in Huntington. Let me sharing a few insights into what we're seeing so far this quarter. Then I'll turn it back over to Jon for some questions and answers. As a customer I would remind you that our remarks today, including the Q&A period, will contain forward-looking statements. Please review our most recent SEC filings for a more complete discussion of risks and uncertainties. To begin, there are 4 key messages I would like to leave you with today. First, we've entered 2023 carrying significant momentum from last year, and we are intently focused on continuing that performance this year. We're executing on our strategy and key initiatives to drive sustainable revenue growth aligned with our risk appetite. Second, while we remain cautious on the macro outlook, we are well positioned to navigate this environment and deliver on our targeted financial objectives. We have solid capital, robust reserves and a top-tier profitability profile. Third, we're taking proactive steps to drive efficiencies. And managing our core run the bank expenses to a low growth level while standing our investment capacity to support our most critical priorities. Examples of these efficiency initiatives include operation accelerate, our branch consolidation program and our recently launched voluntary retirement program and our organizational realignment is underway, strengthening the alignment of our businesses with our strategic priorities, providing efficiencies across the bank and ultimately supporting future growth opportunities. Finally, we're confident in our ability to deliver on both our medium-term financial targets and our full year 2023 guidance that we've provided previously, which remain unchanged. And now I want to provide a detail on what we're seeing in the first quarter, which overall is trending in line with our expectations. First, with respect to deposits, we continue to be dynamic in the market and are seeing success in new deposit acquisition and deepening efforts. This growth is helping to offset lower balances typically seen sequentially into Q1. We expect to grow average deposits in the quarter and are tracking to our full year guidance of between 1% and 4% deposit growth in 2023. On deposit pricing, we continue to be disciplined and manage our deposit pricing on a granular and proactive basis. Overall, betas continue to trend in line with our expectation. As for loan growth, we're seeing growth in the first quarter and continue to be commercially led. We remain on track to deliver our outlook for 5% to 7% full year loan growth. Moving on to net interest income. The quarter is trending as expected. We continue to be confident in our full year guidance of year-over-year growth in core NII between 8% and 11%, that will be driven by loan growth and expanding spreads on a year-over-year basis. As we think about Q1, it's typically a lower seasonal quarter and the step down was expected and included in our guidance. Within fee income, we're seeing another strong quarter in our strategic growth areas with capital markets and key growth drivers and payments performing well and Wealth Management seeing positive net asset flows year-to-date. As we have discussed in prior guidance, certain other fee lines will temporarily reduce that growth during 2023, including lower mortgage fees a step down in the last portion of the TCF purchase accounting accretion that runs through fees, ongoing transition of lease revenues, deposit service charges and our decision to hold SBA loan production on sheet. Additionally, Q1 is typically a seasonally lowest quarter for fees. As a result, we expect fees to land at approximately $465 million to $475 million for the quarter. We forecast Q1 as the low point in fees for the year. And from here, we have clear line of sight to an upward trajectory of fee growth by our key strategic areas throughout the course of the year. We remain confident in our full year outlook for total fee revenues to be flat on a year-over-year basis over the course of this year. On expenses, we're executing on the recent actions we just discussed and continue to track to our full year guidance. Credit trends overall are performing well as we benefited from a well-diversified and balanced portfolio. We are well reserved with loan loss coverage at the top end of our peer group. Net charge-offs are trending consistent with our 2023 guidance to be at the lower end of our 25 to 45 basis points through the cycle expectation for charge-offs. In closing, we're disciplined on our acquisition in our execution. We're focused on driving efficiencies while also investing in revenue-producing initiatives to drive long-term sustainable growth. We're confident in our ability to achieve the financial targets we laid out for the full year. With those opening remarks, let me turn it over to Jon and to you for some questions.

Thank you, Zach. Thank you. Made my job easy. Kind of laid it out for us here we do. Let's just go to the guidance. I don't have the -- everybody else was tied in and I was scribbling so let's make sure I get my schools right here. First quarter deposits, you talked about growth in the first quarter. Just what's driving it? What's the type? I mean, you've obviously reiterated the net interest income guide. But what do we expect to see from type of deposits and pricing?

Yes. So on deposits, just pulling back to frame that answer, we feel great about the momentum that the business has demonstrated over the last 3 quarters, growing deposits throughout the course of 2022, ending 2022 with 2% deposit growth, which clearly was a differentiated position and trend for Huntington and really demonstrating the strength of the deposit franchise fundamentally. It's driven by our ongoing focus on gathering, acquiring and deepening primary bank relationships. And so that's what's working. We're seeing commercial continue to grow very strongly over the course of 2023. We expect commercial to lead that deposit growth. But interestingly, over the course of Q4 and certainly continuing now into Q1, we're seeing consumer also performed very well. And so in the near term, consumer will also be a strong driver of deposit growth. The mix is shifting, as you would expect at this point in the cycle toward the higher interest rate category. So we're seeing more net growth in money market and time deposits but it's very much tracking to our expectations. And as I said in my prepared remarks, the overall deposit cost continues to trend in line with our overall beta expectations. But I think it comes down to the just exceptionally rigorous management approach that we're doing to both deposit volume growth and pricing.

On the consumer growth, is it surprising at all? And I'd just be curious, is this new consumer account openings driving it? Is it rate-driven deposits? What exactly is behind that?

Yes, it's a great question, Jon. It's not surprising to us, but we're really pleased to see it, which is sustained traction in the consumer business. And I think it's really a mix of both of those things. Underlying this, and one of the things I'm sure we'll get to over time is even as we keep expense growth low, we're funneling more and more expense capacity into investments and marketing is one of those. And so we're doing really well acquiring new customer relationships, particularly in a lot of the new TCF geographies where we have a big focus of growing in. And so primary bank relationship acquisition is up in the low single digits on the consumer side, and it's doing really well. and incrementally our activities to market to and better find great pockets of demand in our existing customers for incremental money market and incremental time deposits is also working. So again, seeing nice traction in the fourth quarter continue on into Q1.

Do you expect the funding mix to change over time? Or do you feel like this is core deposit funded growth that you can generate?

The overall deposit funding mix, we come to this point in the cycle, as we've talked about a few times, in a very advantageous position, it large across the company. Loan-to-deposit ratios are low, higher interest rate categories within core deposits were also low and noncustomer sources of funding were relatively low and amply available. And so that allows us to manage a pretty good balance of funding mix both in 2022 and certainly out to 2023. And I think that will mean certainly funding a good portion of our loan growth with core deposits. As I said, seeing the mix incrementally trend towards slightly higher interest rate categories, but very much in keeping with what we would have expected, what we've seen in other past cycles. So we're very much tracking to what we would typically see at this point and also being able to leverage noncustomer sources of funding as well. It's actually a really good champion challenger environment where we can have a very rigorous discussion around where is the next unit of funding coming? What is the cost of that and how can we continue to fund the company in a really advantageous way while staying laser-focused on ultimately the goal, which is growing primary bank relationships.

Okay. Geographic strength. Are you seeing an up take in Chicago, the Twin Cities, Denver.

Yes. So the answer is yes. We've talked about the revenue synergy opportunity coming from TCF being a $300 million run rate revenue benefit by 2025. We already saw $70 million of that run rate in 2022, and we're on the trajectory to get to where we want to go. And about 1/3 of that growth is from consumer. And so the way you see it manifest is by higher-than-average growth rates of acquisition in those geographies, and we're seeing that come through. So very solid year-on-year growth in primary bank relationships in Chicago, in the Twin Cities in Denver, and very encouraging, certainly gaining share and demonstrating the power of the business opportunity we talked about.

Okay. The NII guide. I don't want to focus on the guidance, but I think there's a lot of other things that you can talk about around this, but the 8% to 11%, you're sticking with that. What would drive Huntington to the lower end or the higher end of that range?

So we -- as I noted, continue to feel good about that overall NII guide of between 8% and 11%. Fundamentally, it's driven by both the loan growth growing between 5% and 7% and a higher year-on-year net interest margin. our objective over time is to try to collar the NIM into as tight corridor as we can, where the bottom is protected by the hedge program we have. And the top would really benefit from what is continuing to be an asset-sensitive profile of the company. And as rates continue to incrementally leg higher, helping us there. I think the kind of the vector or where you land within that corridor will depend on what happens with the interest rate environment clearly and the course and trajectory of beta. But we feel like our plan is pretty well set to deliver within that range. And maybe the last thing I'll say is if there's an upside opportunity, it's clearly in a higher for longer rate environment. And so that's one of the potential drivers to bring it to the high end of the range.

Expand on that a little bit because with a lot of the other banks, I think there's a concern that the Fed is going to continue to push rates higher, that causes deposit betas to accelerate, and it's going to put longer-term pressures on the margin. You're not -- in a way, you're not saying that. Let's talk a little bit about higher for longer.

Yes. I don't want to be clear, we're not changing our guidance on long-term beta. We still think that the view we had and we've given before is the right forecast given the yield curve environment. But one can certainly hypothesize that where the interest rate environment to stay even higher for longer than the yield curve currently implies, that could present some incremental longer-term pressure on deposit costs. However, it also would represent significant ongoing opportunity around asset repricing and approximately 50% of our assets are fixed rate. And so those will continue to benefit from a higher for longer environment. And it's our expectation that the net of those 2 things would be positive to NII dollars over the longer term.

Okay. That's a good message. The first quarter trends you talked about, and I think we kind of expected it a little bit lower magnitude of that, anything surprising on the lower Q1 NII.

No, nothing surprising. I mean I think generally, Q1 is a lower seasonal quarter for NII on a dollar basis versus Q4, simply on a day mix perspective. And so things are trending pretty much as we'd expected as it relates to that. One thing that is true is that we've talked about our hedging program that is designed to protect NII in down rate scenarios over the next 3 years. and that, that has an upfront negative carry, given the inverted yield curve. The largest step down or sort of impact of that on a sequential basis of that negative carry is in the first quarter. But again, that was in our plan and our expectation all along.

Okay. Good. So deposit beta is hanging in there with what you expected, the Fed gets a little bit more aggressive, it's net positive for you, sticking with the guidance, but maybe higher rates pushes you to the higher end of the range.

Correct.

Okay. Anybody have anything they want to clear up on NII, I think it's pretty clear, but [indiscernible]. Loan growth, you talked about C&I led kind of discuss what and where and then touch on consumer as well and your appetite and approach there.

Sure. So overall, as I mentioned, we expect loan growth between 5% and 7% commercial growing fast or consumer still slower. And it's pretty much the same run rate of growth we've been seeing now for the last 4 or 5 months. So it's a kind of a continuation of that run rate trend and that we continue to have confidence in it. Within commercial, we're seeing a notable positive strength in our commercial specialty areas as we continue to penetrate into the larger corporate segment to the mid-corporate above the middle market segment. We're doing that in a very focused way where we can leverage industry vertical expertise to find clients and to develop deep relationships. And so our industry verticals around tech and telecom, franchise, industrials health care, an emerging one that we're adding to, which is in Climate finance, all doing well and producing. Another area that's really quite a bright spot, and we see not only in the short term, but in the long term, real sustained opportunities is in the equipment and asset finance space. When we brought the TCF and Huntington businesses together, we formed the seventh largest bank-owned equipment finance platform. Since closing, we've now grown that to be the fifth largest bank-owned equipment finance program. So we are gaining share and really leveraging that platform. And that, coupled with our broader asset-based funding, capabilities really stand to benefit from what is a long-term secular trend around corporations investing in property, plant and equipment to supplant labor challenges to drive automation and efficiency. And so we're seeing sustained nice growth in that. Our distribution finance business, these are the small ticket home and garden personal Motorcraft business that we have. We're seeing that continue to drive nice traction in inventory utilization, our vehicle finance, floor plan business, continues to normalize also. Something we talked about a lot, Jon, as you'll remember, in 2020 and 2021, when supply challenges brought line utilization down quite a bit from roughly 70% pre-COVID to about 30% at the [indiscernible] in early '22. We've already seen that catch back up to about 45% by the end of '22, and we think that will continue to normalize back up to close to pre-COVID levels over the course of the next 4 to 6 quarters. That's an area of continued growth. Business banking. I mentioned that we made the decision to hold on sheet the roughly $1 billion of production that we do in business banking and SBA loans. And so that's a contributor to growth. On the consumer side, we're seeing incremental mortgage, I mentioned as a potential pressure point and fees on a year-over-year basis. But interestingly, it appears to have hit the bottom in terms of run rate production. And so we are seeing incremental production be additive to residential mortgage growth. on sheet, which is helpful. And then also vehicle finance, indirect lending continues to be incrementally additive to growth as well.

Okay. Just a subtle nuance, A lot of your growth drivers seem to be somewhat nuanced or niche businesses. But the overall environment for commercial, have you seen any of that growth moderating or the pipeline is moderating at all?

The overall commercial loan pipelines are higher year-on-year and are pretty stable sequentially. And so no degradation per se. And I think that sort of speaks the generally consistent view of the economy is relatively strong, notwithstanding the uncertainty. Loan demand continues to be there, even albeit with some trepidation on the part of customers to make major commitments, but we're still seeing it come through. And one thing that's interesting that we've been monitoring is in our middle market business where we have a substantial line utilization business. We have seen incrementally some tick down, not significant, but some incremental tick down in line utilization, which we see as a really healthy sign on the part of our general middle market customers that they've got the liquidity to marginally, not significant or marginally pay down lines, which are rising in cost. And so generally, all those signs point to a fairly consistent trend of demand, albeit the areas of outsized growth for us are the ones that I highlighted before.

Okay. Just a couple more on lending. We talked about the Twin Cities in Chicago and I guess, Denver a bit on funding. But how about lending? Do you have the teams in place there in those markets? And what kind of success are you seeing there?

Yes. So we do. So we've built out our middle market and commercial teams in the TCF geographies. One of the things that was so attractive to us about TCF, just taking a step back, is it was in some really great markets just with a less full line business product set and commercial product set. And so it really represented a great opportunity for us to add and to grow into those markets. So the Twin Cities is one of the highest per capita rates of Fortune 100 customers -- or sorry, headquarters per given the population, Denver, which is obviously a very rapidly growing metropolitan area. Chicago, which we're now much larger scale. And so all those represented areas for us to grow into, and we're seeing nice commercial growth traction in each of them.

Okay. Small question, but you guys are very early on ESG. And I remember this years ago, now you're talking about climate finance which not a lot of the other regionals are talking about. What's the opportunity there and maybe size it for us?

We have been doing what we now term climate finance for a while. And so this is just incrementally adding to that because we do see a really significant business opportunity over the near term. If you look at industry forecasts, there's an expectation of trillions of capital expenditures on the part of corporate America in the area of climate-related or energy efficiency-related investments more broadly. And so it definitely represents a significant opportunity for banking. Last year, to give you a sense, we originated about $300 million of loans in this category. Already, the team has got about a $700 million pipeline for 2023. So we're seeing the growth come through. And I think we disclosed in our Investor Day last November, we think around $3 billion over the next several years that we'll be able to capture. There's really 3 big categories or buckets of that climate finance activity. There's the very established and well-known alternative energy sources like solar, wind, hydro, there's another category which is developing rapidly, but still somewhat less mature around distributed networks, battery storage, EV charging. And then there's a last category, which is very still longer term and more nascent around emerging technologies, carbon capture, things of this nature. We are focused to be clear on the more established and well mature parts of the portfolio. But over time, we'll be ready to meet market demand as things evolve over the course of the decade.

Okay. [indiscernible] not normally right now, is what I'm referring to. Anyway, expenses, Zach. You seem very confident on expenses. And it seems like you have a lot of levers to pull how do you balance the revenue growth with the expense outlook? And how much room do you feel you have in terms of expense and efficiency management?

It's an area that we put a major focus on. And Huntington has a core philosophy of driving positive operating leverage of continuing to hold overall expense growth lower than revenue. We've done that in 12 of the last 13 years. And so it's a major commitment that we have. When we gave our long-term profit guidance in Investor Day in November, we said that our goal is pretax preprovision net revenue growth between 6% and 9%, of which approximately 30% of is expected to come from efficiency gains and from improving efficiency over time. And so it's a really important source of profitability. And what's critical is not just keeping expenses growing less than revenue, but to do that in a way that also allows you to funnel more and more of that expense capacity into the categories of expenses that represent investments. capability and offensive growth investments around technology development, marketing and select additions of personnel to drive our strategic growth initiatives and that's the model we are running. To give you a sense, those 3 categories of investments have had a 20% CAGR in the last 3 years. We've doubled tech dev, including in that. This year, even as we keep overall expense growth at 2% to 4% our investment growth within that is, again, more than 20%. So we are very actively funneling expense capacity into those offensive categories, which is helping us to win why we're seeing the kind of deposit growth, for example, that's outperforming the industry, and it's really what will fuel long-term out performance. The way that we do that is by systematically reengineering the cost of the company. A major lever for efficiency, for example, is keeping run the bank tech and operation costs, not development, but run the bank costs growing at low single digits, even as revenues grow at high single digits, it's a major source of efficiency. Another one is this program we call Operation Accelerate, we detailed at Investor Day, that is designed to look at major customer-facing processes the consultant term is a journey where you look for a customer from acquisition to on-boarding, to servicing to all the different elements of a customer life cycle, and you systematically reengineer that process to reduce waste to create efficiencies. We talked about at Investor Day that, that would -- is designed to generate $150 million of run rate saves when that program is mature. That's another great example of it. We continue to execute on our branch rationalization program, where we're taking out about 2% of branches per year. which allows us to just funnel that investment capacity into technology where transactions and acquisitions continue to trend at the margin. And then recently, just this quarter, we introduced a voluntary retirement program. and have done some activities to simplify our organizational structure, which are designed to help us to execute even more effectively but also to generate some efficiencies. So that's the play that we are running, and it's really working. And my expectation is we'll just continue to do that out into the future in order to drive ultimately back to those long-term financial targets, that profit growth that we want.

You got one more question. You touched on [indiscernible] your opportunity that you're most excited about in terms of kind of revenue growth in your markets to make 1 product or product [indiscernible]

So the question was, just for the [indiscernible] of the microphone, what am I most excited about in terms of revenue growth and product growth and just generally the growth profile. It's like picking your favorite child. So it's a little hard to do. But I do think we feel terrific about generally -- the whole business is doing well. We've got a lot of momentum. I think hopefully, you're hearing that through my comments. But if I was to highlight an area, our commercial business, in particular, is really punching above its way right now. And I think the benefit that we had in coming together with TCF is we had almost a 50% jump in the size of the commercial business. And so just that enabled -- that unlocks so many different opportunities to having the wherewithal and capabilities to bank larger clients, hence our penetration of the mid-corporate space in those specialty verticals I talked about before, the capital markets opportunities that, that represents then -- we haven't talked about it, but capital markets is doing exceptionally well and treasury management also. And part of it is because we are explicitly and conservatively penetrating those services into that customer base within the commercial space. And so just a very synergistic opportunity to grow and expand commercially support that with value-added services, which also drive recurring fee revenues. And I think lastly, I'll just touch on this asset and equipment finance opportunity is very significant over time. And we are way punching above our weight as it relates to that. I think very strong capabilities. And when you think about the kind of industrial investment that's going on across the country, but in particular, in our geographic footprint, it's pretty compelling. I will tell you, we feel great about the long-term opportunity that the Intel semiconductor investments into Columbus, for example, which is the headquarters of our company, represent over time. We're talking about expected more than $100 billion of investment into a pretty concentrated geographic area, which is a whole ecosystem of activity that Huntington stands to benefit from, particularly, for example, in those categories. So commercial were large. If I had to pick my favorite child is the one out there.

Just real quick on credit. Sounds like you feel you on credit at the lower end of the range.

Yes. Credit looks terrific. The portfolio continues to trend very well. We're obviously exceptionally focused on monitoring and looking at the portfolio and we're not [indiscernible] way about the potential economic uncertainty. But the portfolio itself and the trends continue to look very healthy. Of course, we expect some normalization of charge-offs from the exceptionally low level we saw last year up into the lower end of our through-the-cycle range. But every indication that our client health is very strong and consistent and we feel great about how the portfolio is positioned right now.

Okay. It's great Zach. I appreciate it. Thank you so much. Appreciate all your supporting your interest.

Thank you.