Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, everyone. We're here for yet another fireside chat, but this is one with my friend Zach here from Huntington. And Zach has some prepared comments. I'll sit here quietly and Zach will go through some of the prepared slides, and we'll get into Q&A. And as always, if you have questions, when Zach is done, feel free to ask them and we'll get them covered. So Zach, take it away.

Good morning, and thanks, Jon. Thanks to RBC for hosting us today. I'd like to start by welcoming everyone listening. We really appreciate your interest in Huntington. We're pleased to share an update today on Huntington's recent accomplishments and growth initiatives. Following my brief presentation, as Jon mentioned, I'll turn it over to him for some Q&A. Before we get started, please review Slide 2, which applies to forward-looking statements we'll make today. Starting on Slide 3. The past 12 months have been dynamic for the banking sector. Over that time, Huntington's stability and performance have been front and center. And our position of strength has been well demonstrated. This position was supported by commitment to our purpose and the dedicated efforts of each of our nearly 20,000 colleagues who remain focused on our customers each and every day. Turning to Slide 4. There are 5 key messages I would share with you today. First, we're capitalizing on our position of strength to lean in, accelerate growth and seize attractive opportunities. While many others have pulled back for capital, liquidity or other constraints. Huntington is well positioned to benefit during times like these. Second, we're driving high-quality loan growth that reflects both our existing core businesses as well as the benefits from recent investments, particularly the new commercial specialty verticals and the expansion into the Carolinas. Third, we're continuing the sustained deposit growth we've delivered over the past 2 years while managing a well-controlled beta. The deposit growth and the granular diversified components of our funding base have resulted in peer-leading funding and liquidity profile. Fourth, we're rigorously managing credit across our portfolios, consistent with our aggregate moderate to low risk appetite. Credit trends are normalizing consistent with our expectations, and we believe Huntington will outperform the industry on credit through the cycle. Finally, we remain intently focused on executing our core strategies. We're acquiring customers, deepening relationships and implementing the other key elements of our plan to drive long-term value creation and win in the marketplace. We continue to drive adjusted CET1 higher while achieving the growth outlook we shared on the January earnings call. We believe this organic growth outlook, coupled with dynamic balance sheet management will deliver accelerating revenue and earnings over the course of 2024 and further expanding into 2025. Turning to Slide 5. Our position of strength is a direct result of intentional actions over many years. Our capital position is robust, including on an adjusted basis, inclusive of AOCI, and we continue our active hedging program to protect capital. Our credit quality reflects our disciplined aggregate moderate to low risk appetite through the cycle and has resulted in net charge-offs consistently lower than peers. Allowance for credit losses is also well above peer levels, and our deposit growth has outperformed peers. And our liquidity coverage ratio of uninsured deposits is top of the peer group at over 200%. Finally, our returns have outperformed our peers, reflective of a strong net interest margin. Our earnings outlook is expected to benefit from both the organic growth posture we've discussed as well as our continued focus to optimize for the highest returns. Turning to Slide 6. I'd like to briefly discuss our outlook for loan growth. Taking a step back to look at the trajectory of loans over a longer period of time, you can see that in 2022, we delivered a high single-digit loan growth. Over the course of last year 2023, we intentionally slowed that growth down to 2% year-over-year by year-end in order to support accelerated capital build and drive for the highest returns on incremental loan growth as the interest rate cycle reached its peak. Now as we enter 2024, given our strong capital base, we're well positioned to reaccelerate loan growth. We expect between 3% and 5% loan growth on an average basis for the full year. As I shared in the January earnings call, we continue to expect growth in the early part of this year to be at a fairly similar pace to the end of last year with building acceleration quarter-by-quarter for the remainder of this year. Q1 average loan growth is tracking approximately 1% higher year-on-year. The exit growth rate by Q4 of 2024, is expected to be at or above the high end of our full year average growth rate, which will support the strong revenue acceleration throughout the year that I mentioned and the good exit momentum into 2025. This growth will be primarily commercial led with consumer also expanding. Within commercial, we expect to see sustained balanced growth from our core driven by expansion in auto floor plan and distribution finance as well as strong growth in regional business banking. The new geographic markets and new commercial specialty banking verticals will also add to that growth. Our new funds finance vertical, in particular, is off to an exceptional start. And both the Carolinas market and the healthcare asset-based lending vertical have already booked new relationships with both loans and deposits. Pipelines are building across all these new areas, and we expect them to be increasingly additive over the course of the year. Turning to Slide 7. As I noted, our new Carolinas market will be an important growth driver for us, not just over the longer term, but right now in 2024. Our expansion here is a powerful example of how we're leveraging, our position of strength to capture new opportunities. The Carolinas are one of the most attractive high-growth geographies in the country with robust population and GDP expansion. We have had a customer and colleague presence in these markets for years with our national commercial businesses. Our market expansion strategy now is focused on building out the full middle market business, along with business banking and corporate specialty segments. We have hired top banking talent with deep rooted backgrounds in these states to drive the initiative. Our approach is focused on building full banking relationships with our customers that bring loans, deposits and fee-based revenues from capital markets and payment services. The launch is planned -- is designed for rapid achievement of profitability and strong return on capital. Through the first quarter of execution, we're making terrific progress. Teams are staffed in each of the 5 markets. They've already brought on new relationships to the banks with pipelines continuing to scale. We believe our expansion into the Carolinas will turn out to be one of the most compelling growth initiatives that the company has executed in quite a while. Turning to Slide 8. As we noted in December, when we announced the Carolinas expansion, we're seeing numerous opportunities to add talented bankers to Huntington. Our track record as a dynamic growth-oriented bank with a powerful culture, one of the strongest brands in the marketplace is proving very compelling. And importantly, our position of strength right now with the capital and liquidity to grow is proving highly appealing to some of the best banking talent in the market. We're pleased to announce today another middle market focused expansion into Texas with a new team based in Dallas. Like the Carolinas, Texas is one of the most attractive growth markets in the country. The state is the eighth largest economy in the world. And as you know, continually ranks at or near the top for population and GDP growth. We've been operating in Texas for a number of years with dozens of bankers, supporting our national commercial franchises, including asset finance, corporate and specialty banking, vehicle finance and capital markets with a sizable Capstone office presence. Our opportunity now is to build on that with the addition of experienced local bankers to further expand our offerings to local middle market clients. Like the Carolinas expansion, we're off to a great start with the hiring of key leaders, and we're quickly adding top talent to staff the rest of the team. Turning to Slide 9. Let's review our net interest income outlook. As I guided in the January earnings call, we expect to see spread revenue trough in Q1, and then post sequential growth from there over the remaining quarters of the year. That growth throughout 2024, will be supported by the accelerating loan growth I described. As I noted in January, given the interest rate scenarios we're using for planning purposes, we project NIM to trough in the first quarter and then be flat to rising over the course of 2024. Our margin continues to benefit significantly from fixed asset repricing at these higher rate levels. When rates do decline, we expect to execute down beta management with the same effect of execution as we have on the way up. We've already begun the first stages of these actions. Our full year net interest income guidance is unchanged with the expectation of spread revenue growth between up 2% and down 2%. Where we land in this range will be a function of where we end up within our loan growth guidance range and the path of the interest rate environment. Turning to Slide 10. Over the past 2 years of this interest rate cycle, we've delivered leading deposit growth with a well-controlled beta. Additionally, we've delivered this with core deposits, having lowered brokered balances from year ago levels. Our usage of FHLB borrowing is also very limited, and we continue to hold extraordinarily strong liquidity. Turning to Slide 11. Our credit quality continues to perform well. Our asset quality is demonstrating the adherence to our aggregate moderate-to-low risk appetite and our disciplined credit culture. Net charge-offs continue to normalize and are trending better than peer levels. And our allowance for credit losses at 1.97% is robust. Turning to Slide 12 and touching on commercial real estate. At just 10% of total loans, we have one of the lowest CRE concentrations of banks over $50 billion of assets. And we have one of the highest reserves for CRE at 4%. Our portfolio is very diversified, with the majority of assets in multifamily and industrial categories. Our office exposure is quite limited at just 1.5% of total loans and with a reserve coverage of roughly 10%. Turning to Slide 13. We're very well positioned to execute our plans during 2024 and our financial guidance remains unchanged. As I noted, we expect loan growth of between 3% and 5% for the full year. As I said, we expect net interest income on a dollar basis to grow between plus 2% and down 2% for the full year. We forecast average deposits to increase between 2% and 4% for the year. We expect to drive strong fee revenue growth this year. Fee revenues on a core underlying basis are projected to grow between 5% and 7%. As a reminder, we generally see the low point for fees on a dollar basis in the first quarter due to seasonality and then growing from that level. For the first quarter, we expect core fee income, excluding the CRT impact of approximately $455 million, about flat year-over-year. Expense growth outlook, excluding notable items, is unchanged at an approximately 4.5% for the year. Lastly, we expect full year net charge-offs between 25 and 35 basis points. With those opening remarks, let me turn it over to Jon for the Q&A.

All right. Thanks, Zach. Like I mentioned before, if you have questions, just put your hand up and we can handle them. But thanks for that. A lot of things to ask about, Zach. But we always start this with just a view on the economy. Can you talk a little bit about how you see it?

Sure. I think what we're seeing now is very in keeping with what we have been seeing for the last year or so, which is a surprisingly strong economic environment that is beating expectations generally. And I think what we're seeing is that corporations certainly in our footprint and with which we are doing business, have generally managed through the higher expense environment from inflation, generally adjusted to these new interest rate levels. In particular, now that the path of interest rates is more clarified there's much more certainty around how they can then evaluate their business growth opportunities going forward. And they're seeing the opportunity to continue to lean into growth incrementally at the margin, certainly with caution, but still with generally a growth footing. And that's also been meaning that they're not changing employment. And we're seeing employment trends within our footprint and certainly nationally that are strong, and that's fundamentally driving consumer confidence, consumer ability to spend. And so the macroeconomic view we see continues to corroborate that. Our own internal data is also corroborating that. We're seeing quite a bit of strength in consumer ongoing spending, very normal deposit trends, in fact, still growing households on a consumer basis at a strong pace. And I would, by the way, also note that all of this is corroborated as well with our own view, which was that the higher for longer interest rate environment was more likely. And I think that's also playing out now and is enuring to our favor, and this is the way we're positioning the balance sheet and our asset sensitivity.

Okay. Great. On loan growth, you touched on it a bit, but on commercial, Give us a little bit more detail on what you expect for growth. What's the variable between the higher and lower end of loan growth -- and I want to maybe separate out the Carolinas and Texas for a second, but just help us understand kind of the variables and where the big drivers...

It's a great question. And we are very much in a growth footing, and we see that posture being able to sustain growth and really drive it as being a powerful opportunity to drive revenue acceleration, as I mentioned. And if I think about the commercial growth, it's both core, and I talked about some of the key areas in my prepared remarks, distribution finance doing really well. Our auto floor plan business continues to expand business banking growing really well. Our commercial real estate exposure, while quite small, is reducing on a dollar and percentage basis. And so that's holding backward, otherwise be an even stronger level of growth. So we're seeing the core perform quite well. And then these new areas of investment are also meaningfully additive to growth. And I would say that, that commercial growth that I illustrated in that slide was roughly split evenly between core and these new initiatives on a net basis. And the new initiatives are doing really well. I think funds finance, in particular, looks to be exceptionally attractive with lots of opportunities to grow both loans and deposits. But the Carolinas, likewise, really is beginning to ramp here. Texas, I should note or early days, the investment there is already built into my expense guidance. There's no change to the expense guidance as it relates to Texas, and it will be additive during 2024, but more a factor for '25 and beyond.

So all of these expansion plans are in the run rate?

Correct. They're in the expectation for the..

How much material can these be -- these new markets?

I think quite material. If you think about the Carolinas, we couldn't be more excited about what we're seeing right there, which is hiring great banking talent with deep connections in the market. And our brand, our way of operating and the posture that we've got, meeting a lot of receptivity in our core customers segment, which is the middle market and mid-corporate space, and there's just a strong receptivity to us. I think over time that this could be one of the largest regions we've got within in -- in the company. Obviously, we're starting from 0 in here. And so we're building up and we're seeing nice growth throughout the course of this year. But I expect hundreds of millions of dollars booked this year and I think over time could be very sizable.

And the higher end of the loan growth range, I think what you're saying is modest growth in Q1, 5% exit rate. If you average that, you're in that kind of mid-single-digit range, how do you get to the higher end of that? Is that possible?

Yes. I think -- for us, it will come down to just the continued traction and execution in our growth initiatives across the board. I think if you take us to back and one of the reasons I did that in my prepared remarks was it's important to note. We've gone from growing at high single digits growth rate in loans in 2022. In fact, Q4 was 10% year-over-year in 2022, down to 2% year-over-year by Q4 of 2023. So we actively decelerated lending growth so as to support capital and to be very prudent that as the course of the interest rate environment increased, we wanted to be very sensitive to driving to sectors with the highest return on capital given the uncertainty of where interest rates would go. I think now given the significant progress we've been made on our capital increased trajectory and given the more certainty around where the economic environment is going, it's the right time to lean in. That process is not an instantaneous one. It takes a while to build back the loan pipelines and to see that pull-through coming through into bookings. And so that's what drives the kind of upward trajectory of growth throughout the course of this year. And so I think where we land in that relative to that range will just be a function of sort of how quickly that pull-through can take place and to some degree, how quickly we can execute on some of these new growth initiatives. We feel high levels of confidence to deliver within that range and we'll, of course, seek to hit the top benefit.

Feels good as we look beyond '24 as well.

I think to me, what I like as the CFO is I see a profile where we're going to be seeing spread revenue accelerating quarter-by-quarter throughout 2024. Fee revenues accelerating. Expenses should stay about the same dollar amount. And so that will be relatively high expense growth in Q1, tailing off to very low expense growth by Q4 of 2024. So that's going to set up a really significant expansion in operating leverage, really strong profit growth throughout the course of '24, maybe sort of keep that going into '25 with a faster run rate of loans, faster run rate of expenses, positive operating leverage, just continuing to drive profitability out to '25 as well.

So it's just a matter of time we need to argue about the timing, right? That's it...

We can argue about the time of..

Your deposit betas through the cycle, they've tracked just above 40%. What are you seeing on deposit pricing in betas? And if the Fed is really not going to start cutting, what kind of expectations would you have?

Yes. I mean we touched on this a little bit in some of the prepared remarks, but we're already seeing what you would expect to see at this point, which is the early signs of down beta actions in the environment broadly across the competitive landscape, shortening the term on CDs, reducing go-to-market pricing in key acquisition categories like money market even changing promotional terms in terms of how long money market rates are set for an initial acquisition periods. We're seeing that be modulated within the industry broadly, and we are doing each of those things also. And I will tell you, notwithstanding the early stages of doing that, we're seeing actually better-than-planned performance in terms of consumer deposit gathering. So we feel really good about how that's working, and it looks to be a pretty rational environment. I would say, and I've said this every time. I made pains to say this each time that as long as the interest rate environment is broadly stable, I do expect beta to increase, albeit at a decelerating rate. And one of the ways we're decelerating is by kind of incrementally tuning down pricing here. And that will continue until such time as there's a drop, but we are actively beginning to see the pivot now towards down beta management. And we're -- our expectation is we'll manage just as effectively in terms of the way down as we have on the way up.

Okay. Good. You talked about NII growing sequentially. But you do have a bit of a range on NII as well?

Yes.

What are some of the factors that could change that? We talked a little bit about loan growth, but what other factors should we keep in mind?

Yes. Probably the biggest driver of where we land -- the 2 drivers of where we land within the range of NII are roughly equally split between volume and rate. And so where we are within that loan growth guidance would be sort of half that potential delta and the other half would be where we are within the interest rate environment. What we have been saying for a while is we're planning on a kind of a range of interest rates. By the way, the range we set at the time of our earnings guidance in Q1. January was at the high end, kind of a higher for longer scenario that only had 3 interest rate cuts in it. And at the low end, the -- more like the forward curve as of November, which had 5 cuts in it. Today, it's 4 cuts is the expectation. So it's pretty much smackdown in the middle. In the middle of that range. It kind of validates that that's a good range. And what we've said further is that in the lower scenario, will be flat to rising in NIM. In the higher interest rate scenario, it will be higher NIM, albeit with a slightly higher deposit beta, and that continues to also be our outlook. And so I think the other half of the NII guidance is sort of where we are within that range. And again, at this point, we look to be kind of landing right in the middle of it vis-a-vis the market expectation.

But setting up well.

Setting up well, and I think everything is sort of setting up according to our plans.

You hinted it's starting some of the hedging for the changing rate environment. What do you mean by that? What are you actively doing, right now?

Vis-a-vis hedging, our core focus is always twofold, protecting capital against uprate scenarios and protecting NIM against down rate scenarios. Late last year, we were very active in potential capital hedging, protection strategies, most notably our swaptions program, which was really designed to protect against meaningful uprate tail risks. As that potentiality has waned, we exited that position, and we've been adding more down rate hedging up protection. We added a couple of billion dollars of forward starting received fixed swaps in Q4. We added about $1 billion of floor spreads. As we go into this year, into Q1, we'll do a little bit more of that same kind of forward starting of received fixed swap protection strategy, but not a lot. And I think part of the thought process is twofold. One is the potentiality for rates to stay high here for a while is pretty real. If you think about the fiscal situation in the United States, the surprisingly strong economic growth, we could easily see rates stay high. And so we don't want to overly bet on down rate here for sure. And then the other thing is that the interest rate curve is already projecting quite a number of cuts. And so you've got to believe a pretty dramatic down rate scenario to make additional down rate hedging wise. Our objective is always to try to collar the NIM to blunt the range of outcomes. And we think we've done that pretty well at this point, continuing to be very dynamic as we go forward watching the course of the economic environment resolve.

Okay. Very helpful. On fees, you touched on it, the 5% to 7% variance. What's driving that? What could get you to the higher end of that, the lower end of that? I know you've got some new initiatives as well that seem to be going pretty well.

I mean, fundamentally, the drivers of fee this year will be our 3 key areas of focus: capital markets, payments and wealth management. Capital markets had a lot of headwinds against it in 2023, decelerating commercial loan production meant that the kind of core capital markets activity had a headwind. And then the M&A environment was clearly very unsettled with lots of uncertainty around where interest rates would go and buyer and seller delays in terms of decision-making. I think both of those factors are incrementally improving here. Certainly, they were improving throughout the course of the last part of last year, and they'll continue to improve throughout the course of this year. We expect capital markets overall to be a pretty strong grower in 2024. That's where -- how exactly that plays out will be one of the factors that will drive between 5% and 7% range for sure. Early days continue to look promising for the full year, but still a somewhat halting M&A environment in the first quarter, but I think continue to look positive throughout the course of this year. Payments is doing really well. We're seeing very strong performance in our card business, in our treasury management activities. We just launched a new secured card product, which is off to a great start as well. That will drive some nice revenue. Our ChoicePay business-to-consumer payment platform is scaling rapidly, should drive some nice revenue growth this year as well. And then our wealth management business is really a very strong performing. We've talked about penetrating more of our customer base with respect to our wealth management services. In late 2022, we had about 1.7% penetration of our mass affluent base. By the end of 2023, it was 2.2%, 50 basis points higher penetration. It drove about 11% higher wealth management households and more than that in terms of assets under management. We continue to see that progress this year as well. I think February, for example, was a record AUM gathering month in our wealth management business. So really strong performance there should drive nice revenue. So I think it's a fairly tight range, 5% to 7%. It will really be a function of just how quickly we see those things continue to play out through 2024.

Okay. Okay. Good. Buybacks, there's been some debate over whether you're interested in buybacks, whether you aren't. It sounds like growth is going to be fairly strong. How do you think through that, Zach? And what would get you more interested in it?

Our capital management policy has not changed, and our priorities have not changed, which is, first and foremost, fund high-return loan growth, secondly, support our dividend; and third, all other uses, including share repurchases. And our view is the best way for us to add value. Long-term fundamental value for our shareholders is to grow high-return loans and the opportunity to kind of accelerate loan growth now, leverage our position of strength to do that is a great way to add value. And so that's the priority for right now. I'll also note that we have already internally moved all of our risk management and capital management policies to be based on regulatory capital, CET1 inclusive of AOCI. We feel that that's a really smart proposal. It's one of the best elements of the Basel III discussions that have been ongoing and not yet finalized. And on that basis, as of Q4, we were at 8.6% up significantly from a year ago, but at 8.6% at the end of last year. Our target range is 9% to 10%. So we're going to continue to drive capital higher until we get within that 9% to 10% range. And then at that point, I would expect us to get back to a more normalized capital distribution model that would include share repurchases over time. But in the time being, to be honest, the opportunity to really accelerate loan growth up this year and really win and capture share in the marketplace is incredibly attractive over the long term.

Okay. Just a little bit of time left. You said all other uses of capital. So that means acquisitions. You do have a strong de novo effort, if you will, in some of these new markets. When might Huntington be interested in M&A? And what could be of interest?

Our focus is organic growth. And I will tell you, the focus on execution and the spirit that we're being really successful is very palpable within the company. And that's the focus now. So I really want to just keep that organic growth success moving and M&A is not on the focus area for us at this time.

Okay. Good. 3, 2, 1, Perfect. Zach. Thank you very much everybody.

Thanks so much. Great to see you.