DBRS Upgrades Huntington to A (low); Trend Now Stable

DBRS, Inc. (DBRS) has today upgraded most of the ratings for Huntington Bancshares Inc. (Huntington or the Company), and its related entities, including Huntington’s Issuer & Senior Debt rating to A (low) from BBB (high). At the same time, DBRS has assigned a Subordinated Debt rating of BBB (high) to the Company, as well as confirmed the R-1 (low) Short-Term Instruments rating of its primary banking subsidiary, Huntington National Bank (the Bank). The trend for all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank was raised one notch to ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

The upgrade reflects the significant progress Huntington has made in executing on its post-crisis strategy, which has resulted in consistent above-peer financial results and continued favorable credit fundamentals. Additionally, the upgrade also considers the Company’s acquisition of FirstMerit Corporation (FMER, completed on 8/16/16), which meaningfully strengthened Huntington’s franchise in DBRS’s view. With the addition of FMER, the Company significantly improved its deposit market share positions in Ohio and Michigan, as well as entered into the attractive markets of Chicago and Wisconsin. Furthermore, the integration has been substantially completed, with the realization of cost savings and revenue enhancement opportunities from the transaction remaining on track, leaving the Company well-positioned to achieve its long-term financial goals on a sustained basis.

Huntington’s ratings are underpinned by its deeply rooted banking franchise focused on the Midwest, particularly in Ohio, where it ranks second in deposit market share, holding 15% of the state’s total deposits, as well as in Michigan (#6 deposit market share). Notably, the Company has dominant market share positions in Columbus (32% share), Akron (39%), Toledo (25%), and ranks second in Cleveland (14%), providing an ample source of funding for its loan portfolio. Overall, Huntington offers a diverse set of commercial and consumer products and services and is highlighted by an extensive and long-tenured auto finance and dealer services business, which currently serves 23 states, spanning the Midwest, Northeast and South regions. DBRS notes that the Company’s fee income sources are ample and diverse, typically representing 30% to 35% of total revenue.

For 2016, Huntington generated positive operating leverage for the fourth consecutive year, with profitability metrics remaining above its peer group median. Results benefited from solid core loan growth, higher interest rates, stable fee income, as well as the impact from the FMER acquisition, with core expenses remaining well-contained even with ongoing investments in the franchise. Most recently, Huntington reported another solid quarterly performance with an adjusted return on average assets of approximately 1.05% in 1Q17, exclusive of net acquisition-related expenses.

Benefiting from the benign credit environment and its highly granular loan portfolio, 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 1Q17 and 2016 was 0.24% and 0.19%, respectively, both of which remain below the Company’s long-term expectations of 0.35% to 0.55%. In addition, NPAs represented just 0.68% of total loans and other real estate owned (OREO) at March 31, 2017.

The Company maintains a solid funding and liquidity profile that reflects a sizable core deposit base, which easily funds the loan portfolio, and healthy levels of liquid assets, with a liquidity coverage ratio (LCR) considerably above 100%. Moreover, Huntington’s capital ratios remain sound, including its Common Equity Tier 1 ratio of 9.7% as of March 31, 2017, which resides well within its targeted range of 9% to 10%.

Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, reported approximately $100 billion in assets at March 31, 2017.

RATING DRIVERS
Given the recent rating action, DBRS views additional positive rating action over the near-term as unlikely. Over the intermediate- to long-term, sustained above-peer financial performance while maintaining sound credit fundamentals could have positive rating ramifications. Conversely, a sustained weakening of credit fundamentals and/or core earnings generation could lead to negative rating actions.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (May 2017), 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, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 13 March 2006
Last Rating Date: 5 July 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.