Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, and really appreciate the chance to come present here at the conference, and thanks to Barclays America and, Jason, to you for hosting us today. I want to welcome everyone, and we appreciate your interest in Huntington. Before we get started, please review Slide 2, which applies to the forward-looking statements we'll make today. Let me begin with a few comments related to our strategy and recent initiatives. Then I'll turn it back to Jason for Q&A. Starting on Slide 3. At Huntington, we live our purpose every day, and we have a clear vision to become the U.S.'s leading people-first, digitally powered bank. As I hope you heard from Steve during our Investor Day in November, we have a well-defined culture that's deeply embedded in the company. Our approach is grounded in our purpose to make people's lives better, to help businesses thrive and to strengthen the communities we serve. And during times like these, Huntington's purpose is evident in how we look out for each other and serve as a source of strength for our customers and communities. We believe this is a key differentiator for us as our colleagues serve our customers and support delivery of our strategy. Turning to Slide 4, there are 5 key messages I want to share with you today. First, our engaged colleagues working together have built a differentiated franchise that are in top rankings for brand and trust. We have a well-balanced mix of businesses between commercial and consumer. We have assembled a broad set of business lines, which we shared at Investor Day, which provide us ample opportunities to support top-tier performance in a range of economic scenarios. Many of these businesses are complemented by substantial growth opportunities from our TCF acquisition. Second, the cumulative effect of the actions we've taken over the last decade gives us the confidence that we've never been better positioned and are operating from a position of strength now. Third, our management team is a group of disciplined operators with a track record of execution and a culture of accountability. The focus on delivering results permeates throughout the organization. Collectively, management represents a top 10 shareholder with strong alignment to long-term shareholder value. Fourth, we're dynamically managing through the current environment, bolstering capital and liquidity. We're optimizing the balance sheet and loan growth to drive top-tier returns, and we're proactively managing the expense base to keep OpEx growth at a very low level. Finally, we're well positioned to continue to deliver on our long track record of top quartile performance. Turning to Slide 5, Huntington is a top 10 regional bank, a top 20 U.S. bank by deposits. We have a leading franchise in our core Midwest markets, complemented by scaled national business lines. We have a powerhouse consumer and business bank with a foundation of dense market presence in the communities we serve. Over time, this has built a granular and highly -- and high-quality deposit base with over 3.5 million customers. We hold top consumer market share in many of our markets and have held the #1 SBA loan lender position for 5 years in a row. This powerful market position is built on deep local connections and supported by leading digital capabilities. We're pleased to have been recognized again by J.D. Power for the best mobile banking app in the industry 4 years in a row. We complement our leading consumer position with a strong and growing commercial banking franchise. Our strategy of acquiring and deepening primary bank relationships has grown a stable base of deposits sent around operating accounts with deep penetration of treasury management. Our deposits are sticky and highly diversified, showing their strength at times like these with very stable trends. In our Midwest footprint, we are a leading middle market bank. And nationally, we have strong positions in corporate specialty banking verticals, supported by industry-leading expertise, a broad distribution finance business for over 13,000 equipment dealers nationwide and one of the largest asset finance businesses in the U.S. These franchises have produced a well-balanced overall portfolio that is split almost equally in both loans and deposits between commercial and consumer. We're a top U.S. banking franchise with 1 of the highest returns on capital in the peer group and consistently recognized for the strength of our culture. Turning to Slide 6. The reputation our colleagues have created of best-in-class customer service results in deep customer confidence in us. This is evidenced by our #1 rank in trust, Net Promoter Score and customer satisfaction. We believe trust is the most important brand element. If our customers trust us, they're going to be inclined to do more business with us. This is a key differentiator. It leaves us well positioned to extend the success into the future. Moving to Slide 7. We operate in this period of disruption from a position of strength. Our core strategy of acquiring and deepening primary bank relationships has resulted in a granular and diversified deposit base, as you see today. We've been disciplined in gathering operating accounts on our balance sheet, and proactively placing larger deposits off balance sheet. Additionally, the granularity of our deposit base positions us to be more prudent in managing deposit base -- deposit betas during this cycle. During the last year, we've consistently delivered deposit growth well above peer levels despite the backdrop of rising rates and quantitative tightening. Through the first quarter of the year, cumulative deposit growth was 2.7%, over 6 percentage points better than the peer median. Our liquidity is robust. Our 2 primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $10 billion and $74 billion, respectively, as of April 28. This pool of available liquidity represented 186% of uninsured deposits up peer-leading coverage. Our capital remains solid, and we expect to continue to build CET1 to the higher end of our 9% to 10% operating range through the end of the year. Our credit reserves are top tier in the peer group at 1.9% and net charge-offs from the last 12 months were 13 basis points compared with the peer median of 22 basis points. We believe are rigorous and consistent through-the-cycle client selection and underwriting drive this outperformance. Importantly, risk management is embedded within all our business lines. At Huntington, everyone owns risk, and we continue to operate within our aggregate moderate to low risk appetite. Huntington is built for times like these. Our strength in deposits, liquidity and capital as well as credit are the result of disciplined execution over many years. Turning to Slide 8. You can see the outcome of the deposit growth strategy I discussed. We have a leading percentage of insured deposits of 69% as of Q1 and the diversification of the franchise across client types, industries and geographies is significant. On Slide 9, you can see we currently have CET1 at the midpoint of our target operating range. As I mentioned during our earnings call, our capital management strategy for the balance of 2023 will result in expanding capital over the course of the year while maintaining our top priority to fund high-return loan growth. We intend to drive CET1 to the top end of our 9% to 10% operating range by the end of the year. We believe this is a prudent approach given the dynamic market environment. We believe we're well positioned to weather the current economic environment. And when you combine our CET1 with our ACL reserve coverage, we have a top quartile loss-absorbing capacity. Turning to Slide 10. As you can see, we have a highly diversified loan portfolio. At our Investor Day this November, you heard senior leaders talk about the alignment and prioritization they have on credit quality and selecting high-quality borrowers. It provides for consistency of performance over the cycle. On consumer, you can see that we're overwhelmingly a secured creditor. Over 95% of our consumer loans have collateral, and we're intently focused on prime and super prime borrowers with an average origination FICO of around 770. On the commercial side, we're also primarily a secured creditor. 90% of our loans are secured by accounts receivable, inventory, machine and equipment and other assets, again, mitigating risk. We have a high degree of diversification within the portfolio with respect to lines of business and industries. And we have broad geographic and property-type diversification within our commercial real estate portfolio. The discipline we have, the diversification and the aggregate moderate to low risk appetite that we operate with are a foundation of our business approach. Turning to Slide 11. We have clearly defined strategies for our respective business segments, supported by a robust set of enterprise capabilities. Within consumer, our Fair Play philosophy is at the center of all that we do and is directly aligned with our mission of looking out for people. We believe the effect of Fair Play continues to be a compelling value proposition that supports growth in primary bank relationships. Since 2010, we've organically grown checking households 5.5% per year, over -- approximately 5x the rate of the average growth of the industry. We've created products and solutions that are innovative and disruptive and we continue to do so. I already mentioned the strength of our SBA business, and there continues to be significant opportunity within Wealth Management, as we've highlighted at Investor Day. Within commercial, we provide a full solution set for our clients, and we have sustainable differentiators. Our focused approach on expertise and advice is positioning us well in high-growth, high-return business lines. I'd like to highlight a couple of these. We have significant scale in asset finance as well as specialty banking verticals, where we provide a national value proposition and sales network. Our asset finance business is a force. The TCF acquisition added complementary delivery channels and products and we now have the fifth largest bank-owned equipment finance company in the country. We're well positioned to support our clients as they make investments to bolster supply chains and invest in technology to manage ongoing labor supply constraints and drive efficiency. Second, our growing fee profile is driven by ongoing payment -- penetration of payments and capital markets. We've made significant investments into our capital markets platform over the past 5 years through organic hiring and acquisition. We're leveraging new capabilities from our Capstone acquisition to drive growth in financial advisory and M&A as well as serving the broader middle market ecosystem. And payments, we're investing to create distinctive solutions as well as leveraging partnerships and acquisitions to build the product set. We continue to see both fee growth and relationship deepening through treasury management. Our consumer and commercial business lines are supported by a foundation of powerful technology capabilities and efficient and scalable core infrastructure and leading digital platforms and by a well-established company-wide risk management culture with a long track record of disciplined client selection. Turning to Slide 12. We're focused on remaining dynamic in our management approach as we navigate the current environment. As noted, we're driving capital to the high end of our CET1 range, optimizing loan growth for the highest returns. We've been deliberate in managing the balance sheet to benefit from asset sensitivity and continue to incrementally add to our hedge positions. Our hedging objectives are to reduce volatility and blend the range of outcomes, protecting capital and uprate scenarios and NIM in downrate scenarios. As we've noted before, our intention is to manage NIM in as tight a corridor as possible, benefiting on the high end from likely higher rates in the near term, and supporting the lower end of the range over the longer term with hedges. We continue to be proactive in our expense management to ensure we're operating at a very low level of expense growth. In the first quarter, we completed a number of actions, including 31 branch consolidations, the voluntary retirement program and organizational realignment with reductions in personnel. In addition, operation accelerate, we have a road map to deliver continued efficiencies going forward. Turning to Slide 13. Finally, I want to reiterate Huntington is built for times like this. We have a strong, well-diversified franchise with a distinctive brand and loyal customers. Our high-quality deposit base, solid capital, robust liquidity and strong credit metrics are the direct result of disciplined execution over many years. We have an experienced management team supported by highly engaged colleagues, and we're fully committed to driving top-tier performance and growing shareholder value. With those opening remarks, let me turn it over to Jason for the Q&A session.

Thanks, Zach. I appreciate that. I guess from the presentation, right, we heard a lot about strong capital, strong liquidity, relatively good deposit trends. And yet, we kind of just look at all this volatility within kind of regional bank stocks of late, Huntington share has kind of caught up at it down 15% last week, for example. What do you just make of all this?

Yes. It's been certainly a very eventful first quarter. At the start of this situation, clearly, there was a focus on select market players that had grown very quickly. I've probably outgrown their own internal risk management capabilities. We're highly concentrated in their business models and had deposit bases that did not have significant diversification and have very low levels of insured deposits. And when coupled with they're also somewhat constrained and challenged capital position, you saw a crisis of confidence in their depositors and ultimately a run that resulted in their failure and the resolution. I think what's happening now is clearly a very skittish equity market environment for banks where investors are on a hair trigger. And there's a lot of uncertainties for them to absorb clearly. With that being said, our view is the differentiation of performance across banks within the industry will become known over time. And the proof will be in the pudding, as they say, in terms of the results. And so from our perspective, we're focused on executing our plan for the year, demonstrating our strength. And I think Huntington is in a position not only to prevail in this environment, but frankly, to be vibrant and to capture the opportunities that will undoubtedly come through the cycle over the next -- over the coming quarters here.

In your slides, you showed you've grown deposits since year-end 2021, while your peers have seen a decline. Maybe just talk to kind of what differentiates you, how you've been able to grow deposits and maybe your outlook for the rest of the year and just where do you see betas heading?

Within the company, we talk a lot about the fact that the deposit base is the foundation of value for any bank and certainly for our bank and you really see that come through in times like this with stability and resiliency. And it's been the product, as I noted in some of the remarks of a long and very consistent strategy of focusing on primary bank relationships and growing through both acquisition and relationship deepening. On the consumer side, we continue to invest and continue to grow households in Q1, for example, our marketing investment to -- for acquisition and relationship deepening was up over 13.5%. The average peer was down more than 6.5%. And so that's part of it. We're also benefiting from our TCF revenue synergies as we grow our consumer business into the acquired TCF geographies. And the investments we've made in marketing technology now will enable us to very efficiently find and engage with not only prospects and new customer acquisition, but existing customers to drive deposit growth. On the commercial side, we likewise have remained focused on growing through both customer acquisition and relationship deepening. One thing I would note though as well, and we highlighted this in our first quarter earnings call, is that we have always been very focused on managing within our commercial segment to keep our operating accounts and the sticky transactional deposit base accounts on our balance sheet, and the more investment related and excess liquidity pools off our balance sheet. To give you a sense, in our Commercial segment, we've got about $35 billion of deposits on our balance sheet, and over -- and almost $25 billion of deposits off balance sheet that we manage on behalf of our customers. That's a very significant mix both on and but also off balance sheet. And so -- this meant that we didn't gather the kind of surge deposits that were inherently less stable over the last several years, and therefore, we've just not seen that run off now. As we -- it's clearly a dynamic market environment. And so as we think about managing beta, we're, of course, seeing the kind of mix shift toward higher interest rate categories within the deposit base -- but overall, we're feeling really good about the way that, that is trending and we're managing within a pretty close range to where we had expected all along.

Got it. And then on the earnings call, you also mentioned you're still targeting 5% to 7% type loan growth for the year. That's probably a bit above what some other banks are talking about, just given a lot of uncertainties out there. So maybe expand in terms of where you're seeing growth and just your thoughts on growing loans in the current backdrop?

Sure. Yes, we do still see the opportunity for sustained loan growth in this environment. Even as we noted during the earnings call and I've reiterated here, being very careful at optimizing where we put incremental capital to drive the highest return, highest yield loan categories, continue to preference capital build while still supporting loan growth. The loan growth that we've seen for the last several quarters and what we expect to see for the next several quarters continues to be commercial led. And I think the investments we've made building out into our TCF geographies in the middle market and in our corporate specialties nationwide has continued to drive moderate levels of loan growth, which is encouraging. Our auto dealer floor plan business continues to see floor plan utilization levels normalize as supply chains continue to resolve within the auto manufacturing space. And so that will be a buttress to growth. And we stand to benefit, frankly, in the short term, but also in the long term, from a significant secular trend around in our asset and equipment finance business around businesses investing in property, plant and equipment to supplant labor supply challenges and to drive efficiency, particularly in times like this when their input prices are rising. And so those are going to be the core sources of growth here in the back half of the year.

And then you've also talked to -- obviously, net interest income declined in the first quarter. I think most banks are pointing to continue to decline in the second quarter. I guess on the earnings call, you talked about potentials for growth in the back half of the year. While I think other banks are still maybe anticipating to decline, maybe just some thoughts in terms of what's driving that?

Sure. For the full year, our expectation is to continue to have another solid year of NII growth on a dollar basis, and it's going to be driven both by higher year-on-year NIMs, but also just the sustained loan growth that I talked about. We did see a step down in the first quarter of NII really driven mainly by day mix, but also by a somewhat accelerated funding cost trajectory relative to our budget. And so I think we had guided in our first quarter earnings call, we expected to see in the second quarter a drop of about the same magnitude into the second quarter. From there, what our expectation is we're going to see NIMs be much more stable when you think about the calendarization of NIM, kind of a larger first quarter impact and then a fairly stable second half NIM environment, and we have seen the yield curve pick up here a little bit, which is accretive to that, still saying moderately asset sensitive and asset betas still have some room to run that will support NIM here in the back half of 2023 and that moderate sustained level of loan growth as well will be the driver overall of NII dollars.

I guess on that, in your slide, I think you revealed that liquidity to uninsured deposits went from 136% at the end of Q1 to now 186%. Maybe just what -- kind of what drove that? And do you really need all that liquidity?

Yes. I mean it's an exceptionally strong level of liquidity. Our philosophy in managing the company is to be just very, very disciplined and focused on the long-term viability of the franchise. And as we've seen, liquidity can really threaten the viability of a bank. And so we want to be just at the very highest level of liquidity that we possibly can have. What we do is we systematically go through our loan and securities book to ensure that we're maximizing the borrowing capacity against that within the Federal Reserve and FHLB borrowing capacities. And so that's what drove that step-up from 135% to 186% over the course of the month of April. And we'll continue to see where there are incremental sources of liquidity going forward. Do we need it? I think the reality is we probably don't. It's probably well more than we need, but the reality is that it's always better to have just robust sources of liquidity. And that's what we try to ensure that we have.

Got it. And then you talked about wanting to manage the NIM over time. Maybe just talk to in terms of what you do in the current environment in terms of hedging? And just kind of what is the NIM range you're targeting?

Yes. As I mentioned just a minute ago in the prepared remarks, the goal of our balance sheet management program over time is to really blunt the range of outcomes, reduce volatility and do 2 things. Tech capital against up-rate scenarios. And certainly, there are scenarios whereby inflation doesn't come down as quickly as the Fed or the market expects and you might see higher interest rates than the forward yield curve, and we want to protect capital into those scenarios. So we've been incrementally adding during the first quarter to operate hedge protection programs and will continue to be dynamic here in the back half of the year around that as well. And then in terms of managing NIM to continue to drive -- to manage NIM within as tight a corridor as we can, and at the high end, staying moderately asset sensitive and benefiting from likely higher rates here in the short term. Even as over the longer term, the prevailing risk is down rates, and so protecting that with a very sizable down rate hedging program that we've built over the last number of quarters. It's difficult incrementally now to add to down rate hedge protection given the inverted yield curve and the cost of adding those hedges. But it is possible to optimize what that hedge protection cost is relative to the value of it. And so in the first quarter, for example, we terminated some of our received fixed swaps and replaced them with floor spreads that provide a very similar level of protection, but with lower upfront funding costs. And so we'll continue to be dynamic and do that kind of thing going forward, again, even as we continue to benefit from asset sensitivity in the short term.

Got it. And then when you were -- in your prepared remarks, you were talking about operation accelerate. And I think another conversations, you've kind of hinted at additional expense initiatives and perhaps some sort of expense program and there is some benefits from some of the business line reworks you've done. Any -- kind of anything more in the -- coming down the pike there? And just anything you want to quantify in terms of what's kind of left to be done?

Sure. On expenses, our posture at this point and our operating plan is to keep expense growth at a very low level. And we've been proactively setting that up for 2023 for quite a while knowing that this was likely going to be in the environment we were operating in and that, that strategy would be a good one. You saw in the first quarter, as we brought down somewhat our revenue outlook, we also incrementally brought down our expense outlook, and that's part of the discipline of the company managing with positive operating leverage as a core tenant. In the long term, we're really benefiting from a series of efficiency drivers like managing our core operations and core tech platform costs to grow at a very low level relative to revenue with throws off significant efficiencies. Our operation accelerate program is going in reengineering systematically, a number of customer-facing work processes that drive expense benefits and also, frankly, revenue opportunities as well. And as I mentioned, the organizational realignment and voluntary retirement program as well. So there are long-term efficiency programs and some short-term ones. Our expectation is we're going to continue to keep expense growth at a very low level for the foreseeable future. And there are some incremental pipelines of efficiency initiatives. Probably the most encouraging 1 is really looking at a number of our major business processes and seeing to what extent there's outsourcing or other efficiency levers that can be gained in terms of driving incremental efficiency from here.