DBRS Confirms Huntington at BBB (high) Following FMER Acq. Announcement; Trend Remains Stable
Banking OrganizationsDBRS, Inc. (DBRS) has today confirmed 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 action follows the announcement of the Company’s definitive agreement to acquire FirstMerit Corporation (FMER) in a stock and cash transaction valued at approximately $3.4 billion. The transaction is expected to close during 3Q16, subject to regulatory and shareholder approvals.
The confirmation of Huntington’s ratings reflects DBRS’s view that the combination is a good strategic fit, deepening and extending the Company’s banking franchise throughout the Midwest. The confirmation is also underpinned by FMER’s strong credit culture, similar loan and deposit profiles, comparable product and services offering, and resilient earnings power. Despite the integration risk related to a large acquisition, DBRS is comforted by the fact that FMER’s operating platforms have all been integrated onto a common platform making the conversion less complex. Moreover, while Huntington has limited recent experience with major integrations and conversions, FMER has considerable experience.
The Stable trend reflects DBRS’s view that Huntington will successfully integrate FMER without material customer disruptions. If the integration is poorly executed, or Huntington is unable to achieve the anticipated costs saves, or build capital post-closing, the ratings could come under pressure. Nonetheless, sustained improvement in core earnings generation and a successful integration of the FMER acquisition, while maintaining sound balance sheet fundamentals could lead to positive rating actions.
Huntington expects significant cost savings totaling approximately 40% of FMER’s expense base, which DBRS views as achievable given the significant branch overlap with the deal. Specifically, approximately 65% of FMER’s branches are located within 2.5 miles of a Huntington branch. Importantly, the Company anticipates that the transaction will be accretive to earnings in 2017, excluding one-time charges, and expects potential revenue synergies with the transaction.
While the acquisition will lead to a decline in Huntington’s capital position, DBRS anticipates that the Company will build capital to a similar position over the intermediate term, especially given the Company’s considerable earning generation capacity. Specifically, Huntington’s CET1 ratio is anticipated to contract to 8.7% at the close from 9.7% at YE15. Furthermore, Huntington will be taking a credit mark of 1.9%, which appears appropriate, given the sound credit profile of FMER’s loan book.
Overall, the acquisition of the Akron, Ohio based FMER will add approximately $25.5 billion in assets, $20.1 billion in deposits, and 366 branches located throughout the Midwest, including Ohio, Michigan, Wisconsin and Illinois. On a pro forma basis, combined assets would approximate $100 billion.
Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported approximately $71.0 billion in assets at December 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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (December 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: Michael Driscoll
Initial Rating Date: 13 March 2006
Most Recent Rating Update: July 8, 2015
For additional information on this rating, please refer to the linking document under Related Research.
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