DBRS: HBAN’s 1Q Core Earnings Down; Lower Spread Income, Higher Loan Loss Provisions; B/S Sound

Summary:
• 1Q15 earnings applicable to common shareholders of $157.9 million, up 1.4% from the prior quarter. Improved QoQ earnings, reflected lower levels of non-interest expense, mostly driven by the non-recurrence of large 4Q14 litigation reserve and franchise repositioning charges.
• Huntington’s adjusted income before provisions and taxes (IBPT; DBRS’ core income metric) decreased modestly, QoQ, due mostly to lower levels of spread income and deposit service charges, partially offset by lower expenses.
• DBRS rates Huntington Bancshares Incorporated’s Issuer & Senior debt at BBB (high) with a Stable trend.

DBRS, Inc. (DBRS) views Huntington Bancshares Incorporated’s (Huntington or the Company) 1Q15 results as solid, despite the challenging operating environment. Higher quarter-on-quarter (QoQ) earnings, reflected a 5.1% decrease in non-interest expense, partially offset by lower levels of spread income and fee income. The decrease in non-interest expense was driven by the non-recurrence of large litigation reserve and franchise repositioning charges taken in 4Q14.

Huntington’s IBPT decreased modestly, QoQ, primarily due to lower levels of spread income and deposit service charges, partially offset by lower expenses. Lower spread income, reflected two fewer days in the quarter along with net interest margin pressure, partially offset by 2.0% growth in average earning assets. Meanwhile, lower core expenses were driven by declines in levels of professional services costs, outside data processing expense, and deposit and other insurance costs. Importantly, balance sheet fundamentals remain strong, as evidenced by Huntington’s sound asset quality, and solid funding and capital profiles.

Loan growth was modest during 1Q15, as the Company has become more selective in certain segments, including commercial & industrial and commercial real estate loans. During 1Q15, Huntington transferred $1.0 billion of auto loans into loans held-for-sale, in expectation of a 2Q15 auto loan securitization, as well as completed its acquisition of Macquarie Equipment Finance, Inc. which added $0.8 billion of equipment finance leases to the balance sheet.

Huntington’s asset quality remains sound, despite an increase in non-performing loans, mostly due to one large steel industry related loan. Moreover, net charge-offs remain low. Of note, provisions for credit losses rose back to more normalized levels, off of a fairly low provision in 4Q14.

Capital remains solid, even with balance sheet growth and stock repurchases. In March 2015, The Federal Reserve did not object to Huntington’s capital plan, which included a 17% increase in the quarterly dividend per common share to $0.07 starting in 4Q15, and the potential repurchase of up to $366 million of common stock through 2Q16.

DBRS rates Huntington Bancshares Incorporated Issuer & Senior debt at BBB (high) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.