DBRS Upgrades Huntington Bancshares Inc.’s Senior Debt to BBB (high); Changes Trend to Stable

DBRS, Inc. (DBRS) has today upgraded the ratings of Huntington Bancshares Inc. (Huntington or the Company), and its related entities, including Huntington’s Issuer & Senior Debt rating to BBB (high) from BBB. At the same time, DBRS revised the ratings trend to Stable from Positive. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The rating actions consider Huntington’s continued progress in strengthening its franchise through customer acquisition/product penetration initiatives, and sustained improvement in asset quality, both of which, in DBRS’s view, enhance the Company’s future earnings prospects. DBRS notes that while Huntington suffered multiple quarterly losses during the financial crisis, the Company’s earnings are now more resilient, even with the challenging operating environment. The ratings and the Stable trend also consider Huntington’s deeply entrenched banking franchise, healthy capital position and solid funding and liquidity profiles, comfortably placing the Company within its new rating peer group.

DBRS believes that the Company has favorably positioned itself for enhanced future revenue generation by growing its customer base and share of customer wallet. Indeed, over the last two years, reflecting its Optimal Customer Relationship model and “Fair Play Banking” philosophy, Huntington grew checking account households by 19.8% and commercial relationships by 11.9%. Furthermore, product penetration has improved, as households with greater than six services represented a solid 48.0% of total households in 1Q14, as compared to 42.9% in 1Q12. Meanwhile, commercial relationships with greater than four services represented 39.5% of total commercial relationships in 1Q14, versus 32.7% in 1Q12. DBRS anticipates these initiatives will strengthen the Company’s earnings drivers.

Positively, the Company continues to have success in growing average loans, which is offsetting the impact of the sustained narrowing of its net interest margin (3.27% for 1Q14), and has led to modestly higher spread income over the last two quarters. Core fee income, however, remains pressured, reflecting lower levels of mortgage banking income. That said, DBRS notes that Huntington provides a broad menu of fee-based products and services that generally contributes over one third of total revenues, providing some stability and diversification to earnings. Finally, and reflective of its growth strategy, the Company’s expense base remains somewhat elevated.

Underpinning its ratings, the Company maintains a defensible and deeply rooted banking franchise, which includes a branching network extending through six Midwestern states. Huntington has a particularly strong market position in Ohio, at number two, where it holds 12.4% of total deposits. Moreover, it has higher penetration levels in specific Ohio metropolitan statistical areas, including Columbus, Canton, and Toledo. Huntington recently bolstered its franchise with the acquisition of Camco Financial Corporation, which deepened and extended its branch network in Ohio. Moreover, the Company recently announced its intent to acquire 24 branches from Bank of America Corporation, which will deepen its branch network and market share in Michigan.

Supporting the rating actions, is the Company’s sustained improvement in asset quality, which reflects stabilizing levels of non-performing assets (NPAs) and low net charge-offs (NCOs). Specifically, Huntington’s NPAs represented a manageable 0.82% of total loans at March 31, 2014, down from 1.01% at March 31, 2013. Additionally, NCOs were a low 0.40% of average loans for 1Q14, well within Huntington’s long term target range of 0.35% to 0.55%. It is DBRS’s opinion that asset quality will continue to improve, especially given that the Company’s criticized commercial loans declined 11.4%, year-on-year, and consumer loan delinquencies continue to track downward. Finally, reserve coverage remains adequate, with total allowance for loan and lease losses representing a solid 1.42% of total loans and leases at March 31, 2014.

Huntington’s solid funding and liquidity positions are underpinned by a large core deposit base that easily funds loans, and sound capitalization provides solid loss absorption capacity and support for future growth. At March 31, 2014, the Company reported a solid tangible common equity ratio of 8.63% and a Tier 1 common risk-based ratio of 10.60%.

Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported $61.1 billion in assets at March 31, 2014.

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: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found on the DBRS website under Methodologies.

The primary sources of information used for this rating include company documents 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.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 13 March 2006
Most Recent Rating Update: 14 May 2013

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