DBRS: HBAN’s 3Q Sound: Lower Mortgage Banking Revenue; Litigation Reserve Build; B/S Solid

Summary:
• Huntington reported 3Q15 earnings applicable to common shareholders of $144.6 million, down 23% from $188.2 million for 2Q15, and down 2% from $147.0 million for 3Q14.
• Lower quarter-on-quarter (QoQ) earnings mostly reflected a $38.2 million addition to litigation reserves, lower mortgage banking income, and lower gains on loan sales.
• 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) 3Q15 results as sound. Lower QoQ earnings were primarily driven by a sizable addition to litigation reserves related to an almost decade old legal issue, a decline in mortgage banking income, and lower gains related to the sale of loans. Importantly, balance sheet fundamentals remain sound, reflecting sustained average loan and average deposit growth, and solid liquidity and capital profiles.

Overall, revenues declined moderately QoQ, due mostly to a sizable decrease in mortgage banking income, and lower gains on loan sales. The decline in mortgage banking income reflected a significant decrease in net Mortgage Servicing Rights hedging related activities, and a decline in origination and secondary marketing income. Meanwhile, spread income improved sequentially driven by higher average earning assets partially offset by a narrower net interest margin. Average earning asset growth was driven by increases in both loans and securities. Specifically, growth in average loans mostly reflected higher levels of automobile and commercial real estate construction loans. Finally, expenses remain well managed. Indeed, non-interest expense, excluding the contribution to litigation reserves and merger and acquisition related expenses, was modestly down, QoQ.

Balance sheet fundamentals remain solid. Huntington’s asset quality remains sound, reflecting slightly lower sequential non-performing assets and sustained low net charge-offs. Meanwhile, despite the repurchase of approximately $72 million of common stock, the Company’s capital metrics remain solid, including a tangible common equity ratio of 7.89% and an estimated Basel III common equity tier 1 capital ratio of 9.72%, as of September 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.