DBRS Morningstar Confirms Huntington at ‘A’ on TCF Acq. Announcement; Trend Remains Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Huntington Bancshares Inc. (Huntington or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Huntington National Bank (the Bank). The trend for all long-term ratings at the Company and all ratings at the Bank remains Negative. The trend for all short-term ratings at the Company is Stable. The ratings action follows the announcement by Huntington that it is buying TCF Financial (TCF) for approximately $6.0 billion in stock. The deal is expected to close in mid-2021, subject to customary closing conditions including regulatory approvals as well as shareholder approval from both companies.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects DBRS Morningstar’s view that the combination is a sound strategic fit that should enhance Huntington’s already solid regional bank franchise, while improving profitability metrics. The mostly in-market acquisition offers significant identified cost saves, while we expect revenues to benefit. Moreover, Huntington’s strong liquidity position, core deposit funding and sound capital position should remain intact upon closing of the merger.

While DBRS Morningstar is wary of the substantial integration risk associated with such a large transaction, these concerns are somewhat mitigated when considering Huntington’s proven track record of strengthening its franchise through successfully acquiring and integrating other large banking franchises. However, this transaction follows closely on the MOE between TCF and Chemical Financial, which may add to the complexity of the integration.

The Negative trend reflects the adverse impact resulting from the Coronavirus Disease (COVID-19) pandemic, which is expected to pressure Huntington’s earnings and asset quality. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

RATING DRIVERS
Given the Negative trend, an upgrade of the ratings is not currently anticipated. However, DBRS Morningstar would revise the trend to Stable if the economic fallout from the coronavirus pandemic is not prolonged and the Company’s performance remains aligned with similarly-rated peers. Over the longer term, if Huntington successfully integrates the TCF acquisition and delivers on its transaction assumptions including earnings growth, the ratings would be upgraded.

Conversely, a downgrade of ratings would arise from a sustained decline in core profitability levels, a significant deterioration in asset quality, or if the merger integration is poorly executed.

RATING RATIONALE
DBRS Morningstar sees the transaction as a long-term positive for Huntington’s franchise. On a pro-forma basis, the combined company would have approximately $170 billion in total assets with expanding market positions in Michigan and Ohio, as well as the introduction of new markets for Huntington in Minneapolis and Denver. Additionally, TCF’s national dealer finance and equipment finance businesses will be additive to Huntington’s existing activity.

DBRS Morningstar expects the combination to provide tangible cost savings as well as revenue growth opportunities. Indeed, Huntington has identified $490 million (pre-tax) in cost savings primarily associated with branch consolidation and elimination of overhead and realization of efficiencies. Additionally, the combined entity will be able to leverage its greater scale to increase investments in technology.

Importantly, credit fundamentals are expected to remain sound, providing key support to the ratings confirmation. Specifically, the combined company is expected to have a proforma CET1 ratio of approximately 10% at closing, modestly above Huntington’s current capital levels. Additionally, DBRS Morningstar considers the gross loan credit mark to be sound at 2.4% of TCF loans.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Huntington are as follows: Franchise Strength –Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277