DBRS: HBAN’s 2Q Earnings Up: Broad–Based Fee Inc. Growth, Including Auto Securitiz. Gain, Wider NIM

Summary:
• Huntington reported 2Q15 earnings applicable to common shareholders of $188.2 million, up 19.2% from $157.9 million for 1Q15.
• Higher quarter-on-quarter (QoQ) earnings were driven by broad-based fee income growth including higher mortgage banking income and a $5 million automobile loan securitization gain, along with higher spread income reflecting a 5 bps widening of the net interest margin (NIM).
• 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) 2Q15 results as solid, with sustained loan and deposit growth, and the maintenance of solid balance sheet fundamentals. Overall, the sequential improvement in quarterly earnings was reflective of the Company’s strong Midwest banking franchise along with its continuing focus on customer growth and product penetration. Additionally, given the continued strong growth within its auto finance business, Huntington once again executed an auto loan securitization to reduce concentration.

Overall, the sizable QoQ increase in earnings was mostly driven by broad-based fee income growth including higher levels of mortgage banking income, deposit service charges and a $5 million automotive loan securitization gain. The improved mortgage banking income reflected an increase in net MSR hedging activities, and origination and secondary marketing income. Additionally improved earnings reflected an increase in spread income driven by higher average earning assets and a 5 bps widening of NIM, which was primarily driven by the higher yielding assets acquired with the Macquarie Equipment Finance, Inc. (Macquarie) transaction. Finally, expenses which remain somewhat high, increased sequentially, mostly reflecting higher personnel costs due to annual merit increases, and an increase in headcount which was reflective of the Macquarie acquisition.

During the quarter, average loans were up, led by higher levels of commercial and industrial loans (C&I) and residential mortgage loans, partially offset by a decline in automobile loans. Higher C&I loans mostly reflected the addition of equipment finance leases from the Macquarie acquisition. Meanwhile, at the end of 1Q15 Huntington moved $1 billion of auto loans into held for sale and subsequently securitized $750 million of the loans in 2Q15.

Balance sheet fundamentals remain solid. Huntington’s asset quality remains sound, reflecting slightly lower non-performing assets and continued low net charge-offs. Despite the purchase of approximately $99 million of common stock, the Company’s capital metrics remain ample, including a tangible common equity ratio of 7.91% and an estimated Basel III common equity tier 1 capital ratio of 9.65%, as of June 30 2015.

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.