DBRS Confirms Huntington’s Senior Debt at BBB (high); Maintains Stable Trend

DBRS, Inc. (DBRS) has today confirmed all the ratings of Huntington Bancshares Inc. (Huntington or the Company), and its related entities, including Huntington’s Issuer & Senior Debt rating of BBB (high). At the same time, DBRS maintained the Stable ratings trend. The ratings confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings confirmation considers Huntington’s strong Midwest banking franchise and solid balance sheet fundamentals including sound asset quality, solid capital, and ample funding and liquidity positions. The ratings also consider the Company’s pressured earnings power. Overall, DBRS views the Company as being one of the top banks within its rating peer group. DBRS notes that sustained improvement in core earnings generation, while maintaining sound balance sheet fundamentals, could lead to positive rating actions. Conversely, weakening balance sheet fundamentals and/or core earnings generation could lead to negative ratings actions.

Underpinning its ratings, is a defensible and deeply rooted banking franchise, which includes a branch network that extends through six Midwestern states. Of note is Huntington’s strong presence in Ohio where it holds the third largest deposit market share, representing 12.2% of total deposits. Moreover, it has higher penetration levels in specific Ohio metropolitan statistical areas, including Columbus, Canton, and Toledo. During 2014, the Company bolstered its franchise with the acquisition of Camco Financial Corporation ($757 million in assets), which deepened and extended its branch network in Ohio. Moreover, during 2014, the Company acquired 24 branches from Bank of America Corporation, which added to its branch network and market share in Michigan. More recently, on March 31, 2015, the Company acquired Macquarie Equipment Finance Inc, which enhanced its equipment finance business by adding a national healthcare and technology platform.

It is DBRS’s view that Huntington has favorably positioned itself for enhanced future revenue generation, especially under a more normalized operating environment. Importantly, through its “Optimal Customer Relationship” model and “Fair Play Banking” philosophy, Huntington continues to improve its consumer and commercial product penetration, as well as its commercial revenue generation. Moreover, despite numerous headwinds including Reg E, and the Durbin Amendment, consumer checking household revenues have rebounded.

Earnings power remains pressured due to the difficult operating environment. Nonetheless, despite the sustained narrowing of its net interest margin, Huntington’s 2014 adjusted income before provisions and taxes (DBRS’s core earnings metric; IBPT) increased moderately, year-on-year (YoY). Specifically, higher spread income, from an 8.6% increase in average loans, reflecting higher levels of automobile loans and commercial and industrial loans, more than offset lower core fee income, driven by a significant decrease in mortgage banking income. Reflective of continuing investments in the Company, expenses remain somewhat elevated. More recently, during 1Q15, Huntington’s adjusted IBPT contracted moderately quarter-on-quarter (QoQ), mostly due to lower levels of spread income and deposit service charges, partially offset by lower expenses.

Supporting the ratings, the Company maintains sound asset quality, as evidenced by its low net charge-offs (NCOs) and acceptable levels of non-performing assets (NPAs). Specifically, NCOs represented 0.20% of average loans for 1Q15, and 0.27% for 2014, both of which are below the Company’s long term target range of 0.35% to 0.55%. DBRS notes that NCOs have likely hit a floor, especially given the benign credit environment, and their current low levels. Meanwhile, NPAs represented a manageable 0.84% of total loans, at March 31, 2015, up moderately from 0.71% at December 31, 2014, and up slightly from 0.82%, at March 31, 2014. The bump up in 1Q15 NPAs mostly reflected one relationship related to the Steel industry. Finally, reserve coverage remains adequate, with total allowance for loan and lease losses representing 1.27% of total loans and leases, and 166% of nonaccrual loans and leases, at March 31, 2015.

Huntington’s ample funding and liquidity positions are underpinned by a large core deposit base, and a good quality securities portfolio. DBRS notes that core deposits easily fund net loans. Additionally, sound capitalization provides for solid loss absorption capacity and support for future growth. Despite the repurchase of $250 million of common stock as part of the 2014 CCAR plan, and the recent acquisition of Macquarie Equipment Finance Inc., the Company’s capital metrics remain solid, including a tangible common equity ratio of 7.95% and a Basel III common equity tier 1 capital ratio of 9.51%, as of March 31, 2015.

Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported $68.0 billion in assets at March 31, 2015.

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 (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at http://www.dbrs.com/about/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: 10 June 2014

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