DBRS Confirms Huntington Bancshares Inc.’s Senior Debt at BBB; Changes Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of Huntington Bancshares Inc. (Huntington or the Company), including its Issuer & Senior Debt rating of BBB. At the same time, DBRS changed the trend on the ratings to Positive from Stable. Finally, DBRS discontinued the ratings of several trust preferred securities, which were redeemed. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The change in trend to Positive from Stable considers Huntington’s improved asset quality over the prior year, and continued traction with its customer acquisition/product penetration initiative, both of which, in DBRS’s view, benefit the Company’s future earnings prospects and provide momentum towards the next rating subcategory. DBRS notes that Huntington reported multiple quarterly losses during the financial crisis. Upon recovery and supporting the trend change to Positive, the Company’s earnings have been resilient, despite continued pressure from the slow growth economy and low interest rate environment.

Huntington’s ratings reflect its deeply embedded Midwest banking franchise, underpinned by solid market shares, especially within its Ohio markets. Ratings also consider the Company’s sound asset quality, solid capital position, and ample liquidity profile. DBRS comments that sustained improvement in asset quality and continued progress in strengthening its franchise and earnings drivers, could lead to positive rating actions. Conversely, sustained deterioration in asset quality and/or deterioration in franchise and earnings drivers, could lead to negative ratings pressure.

The ratings consider the Company’s deeply rooted banking franchise, with a branching network that extends through six Midwestern states. DBRS notes that the Company’s deposit franchise is defensible, especially in the state of Ohio, where it holds 12.5% of total deposits. Moreover, Huntington has higher penetration levels in specific Ohio metropolitan statistical areas, including Columbus, Canton, Toledo, and Youngstown. Particularly noteworthy is the Company’s top-ranked Columbus deposit market share of 30%. DBRS notes that Huntington’s solid market shares provide a strong, stable, and dependable source of core funding for its assets.

Despite the difficult operating environment, Huntington’s asset quality improved during the year, reflecting continuing contraction in non-performing assets (NPAs) and NPA inflows. Specifically, NPAs represented a manageable 1.01% of loans (excluding performing restructured loans) at March 31, 2013, down from 1.09% at December 31, 2012 and 1.51% at December 31, 2011. Meanwhile, net charge-offs (NCOs) contracted to 0.51% of average loans for 1Q13, down from 0.69% for 4Q12. For 2012, NCOs represented 0.85% of average loans, down from 1.12% for 2011. Importantly, the Company’s commercial criticized loans and consumer delinquencies continue to decline, perhaps signaling further asset quality improvement. Finally, Huntington maintains a solid allowance for credit losses, at 207% of nonaccrual loans and 1.9% of loans.

Earnings on a core basis remained resilient throughout the year. Huntington has a well-diversified product set, ranging from commercial and retail loans and deposit products to mortgage banking, trust, brokerage, and other services. Importantly, fee income has historically contributed a significant component of Company revenues, ranging from a high 30% to low 40%. Positively, Huntington’s “Optimal Customer Relationship” program and “fair play” approach have driven higher levels of customers and product penetration, which benefits the Company’s bottom line.

Another consideration for Huntington’s ratings is a solid funding and liquidity profile, which is underpinned by a strong core deposit base that easily funds loans. At December 31, 2012, core deposits (DBRS calculated) represented a high 108% of net loans. Rounding out the Company’s liquidity position is a securities portfolio that represents just under 17.0% of total assets, access to the Federal Home Loan Bank and the Federal Reserve discount window.

Despite the repurchase of 27.7 million common shares over the last five quarters and the redemption of $230 million in trust preferred securities, Huntington’s capital remains solid and provides sound loss absorption capacity against unexpected losses. DBRS notes that the Federal Reserve had no objection to the Company’s proposed capital actions, which include the repurchase of up to $227 million of common stock through the first quarter of 2014 and an increase in the common stock dividend. At March 31, 2013, Huntington’s reported a solid tangible common equity ratio of 8.92% and a Tier 1 common risk-based ratio of 10.62%.

Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported $56.1 billion in assets at March 31, 2013.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Bank & Bank Holding Company Trust Preferred Securities, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include publicly available company documents, the Federal Deposit Insurance Corporation, and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

[Amended on August 28, 2014, to reflect actual methodologies used.]

Lead Analyst: Mark Nolan
Approver: Alan G. Reid
Initial Rating Date: 13 March 2006
Most Recent Rating Update: 4 April 2012

For additional information on this rating, please refer to the linking document under Related Research.