DBRS Confirms Huntington at BBB (high); Revises Trend to Positive

DBRS, 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). Additionally, the trend on all long-term ratings and Huntington’s Short-Term Instruments rating has been revised to Positive from Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings confirmation reflects Huntington’s defensible and deeply rooted banking franchise throughout the Rust Belt, including its top tier position in Ohio, as well as its consistent, above peer median financial performance, sound asset quality and solid balance sheet fundamentals. In addition to its above peer financial performance, the Positive trend considers the pending FirstMerit (FMER) acquisition (announced in January 2016), which DBRS views favorably and the expectation that the transaction will be completed in 3Q16 and successfully integrated, consistent with the Company’s guidance. In addition, DBRS believes Huntington is well positioned to achieve its long-term financial goals.

Overall, from DBRS’s perspective, the addition of FMER will meaningfully strengthen Huntington’s franchise, as it will result in the number one market share position in Ohio, add depth in Michigan, as well as provide entrance into attractive new markets, including Chicago and Wisconsin. Importantly, FMER brings a strong credit culture, similar loan and deposit profiles, comparable products and services, as well as resilient earnings power. Additionally, the transaction is expected to bolster revenue generation, provide substantial cost saves and ultimately improve returns. Finally, 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. DBRS notes that while Huntington has not undergone a recent major integration and conversion, FMER has considerable experience.

Huntington’s earnings power remains resilient despite the difficult operating environment. Indeed, the Company’s 2015 adjusted income before provisions and taxes (DBRS’s core earnings metric; IBPT) increased 8.6% compared to the prior year driven by solid auto and C&I loan growth, as well as improved card and mortgage banking income. Expenses still remain somewhat elevated, reflecting continued investments in the Company. Most recently, Huntington reported another solid quarterly performance with a return on average assets (ROAA) of 0.96% in 1Q16.

Providing support to the ratings, the Company’s asset quality remains sound, including low levels of net charge-offs (NCOs) and non-performing assets (NPAs). Specifically, Huntington’s NCO ratio for 1Q16 and 2015 was 0.07% and 0.18%, respectively, both of which remain below the Company’s long-term expectations of 0.35% to 0.55%. In addition, NPAs represented a manageable 1.02% of total loans and other real estate owned (OREO), up from 0.78% at 4Q15, reflecting pressure on its relatively small portfolio of energy loans (less than 1% of total loans). Finally, reserve coverage remains adequate, with the loan loss reserve representing 1.19% of total loans and leases and 123% of nonaccrual loans and leases as of 1Q16.

Huntington maintains an ample funding and liquidity profile that reflects a sizable core deposits base, which easily funds net loans, and healthy levels of liquid assets with a liquidity coverage ratio (LCR) above 100%. Moreover, DBRS views Huntington’s capitalization as solid even with an expected 100 basis point decline in its Common Equity Tier 1 (CET1) ratio upon completion of the FMER transaction. DBRS notes that the Company expects to build its capital position back up over time (Huntington’s CET1 ratio was 9.7% at 1Q16).

Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported approximately $72.6 billion in assets at March 31, 2016.

RATING DRIVERS
Successful integration of the FMER acquisition and delivering on its transaction assumptions, while maintaining sound balance sheet fundamentals, could lead to positive rating actions.

If the FMER integration is poorly executed or the Company is unable to achieve the anticipated cost saves or build capital post-closing or any evidence of weakening credit fundamentals could lead to negative rating actions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: Michael McTamney
Rating Committee Chair: William Schwartz
Initial Rating Date: 13 March 2006
Most Recent Rating Update: 26 January 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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