Huntington Bancshares Incorporated (NASDAQ:HBAN) Q1 2024 Earnings Call Transcript

Huntington Bancshares Incorporated (NASDAQ:HBAN) Q1 2024 Earnings Call Transcript April 19, 2024

Huntington Bancshares Incorporated beats earnings expectations. Reported EPS is $0.28, expectations were $0.25. HBAN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the Huntington Bancshares First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Tim Sedabres, Director of Investor Relations. Please go ahead, Tim.

Tim Sedabres : Thank you, Operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President, and CEO and Zach Wasserman, Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website. With that, let me turn it over to Steve.

Stephen Steinour : Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We’re pleased to announce our first quarter results, which Zach will detail later. Again, these results are supported by our colleagues who live our purpose every day, as we make people’s lives better, help businesses thrive, and strengthen the communities we serve. Now on to Slide 4. There are five key messages we want to leave you with today. First, we are executing our organic growth strategies and leveraging our position of strength. As planned and managed over the years, our liquidity and capital metrics are top tier. Second, we delivered loan growth in the quarter and expect the pace to accelerate over the remainder of the year.

Our teams are acquiring new customers and relationships in both commercial and consumer categories. We are maintaining our momentum in deposit gathering with a well-managed beta. Third, we expect to drive sequential increases in net interest income and fee revenues from the level reported in the first quarter, supported by accelerating loan growth, coupled with effective balance sheet management. Fourth, we continued to rigorously manage credit, consistent with our aggregate moderate to low risk appetite. Finally, we are positioned to power earnings expansion over the course of the year and into 2025. Our investments are delivering results and the underlying core is performing well. I will move us on to Slide 5 to recap our performance. We delivered long growth with balances growing by $1.6 billion from a year ago and have grown by a 4% CAGR over the past two years.

This pace reflects our intentional optimization efforts last year, and we believe we are positioned to accelerate growth over the course of 2024 and carrying into 2025. Deposit balances also increased, growing $7.9 billion, or 5.5% over the past year. Capital remains strong with reported common equity tier 1 of 10.2% and adjusted common equity tier 1 of 8.5%, inclusive of AOCI. Liquidity remains top tier with coverage of uninsured deposits of 205%, a peer-leading level. Credit quality was stable as debt charge-offs improved by 1 basis point from the fourth quarter to 30 basis points. We are sustaining momentum and growth of our primary bank relationships, with consumer and business increasing by 2% and 4% respectively year-over-year. We continue to seize opportunities to add talented bankers.

Over the past two quarters, we’ve added teams in the Carolinas and Texas. We’ve also launched new commercial specialty verticals including Fund Finance, Healthcare ABL and Native American Financial Services. The momentum we have across our markets, coupled with our strong culture, continues to attract great banking talent to Huntington. We expect to add additional colleagues and capabilities as we move through the year. We have clear objectives for 2024, focused on executing our organic growth strategies. This should result in accelerated loan growth, sustained deposit growth, and expanded fee revenue streams. Coupled with our expense outlook, we expect to see PPNR expanding over the course of the year and into 2025. The macro environment is conducive to growth with customer demand holding up well in a resilient and stable economy.

The addition of new markets and bankers is supporting expanding loan pipelines with late-stage commercial pipelines ending the quarter at the highest level in over a year. Zach, over to you to provide more detail on our financial performance.

Zach Wasserman : Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.26 and adjusted EPS of $0.28. The quarter included $39 million of notable items, primarily related to the updated FDIC deposit insurance fund special assessment of $32 million, which was driven by higher losses from last year’s bank failures. Additionally, we incurred $7 million of costs related to incremental business process offshoring, efficiency plans that were finalized during the quarter. These items collectively impacted EPS by $0.02 per common share. Return on Tangible Common Equity, or ROTCE, came in at 14.2% for the quarter. Adjusted for notable items, ROTCE was 15.3%.

Average deposits continued to grow during the quarter, increasing by $1.1 billion or 0.7%. Cumulative deposit beta totaled 43% through quarter end. Average loan balances increased by $701 million or 0.6% for the quarter. Credit quality remains strong with net charge-offs of 30 basis points. Allowance for credit losses was stable and ended the quarter at 1.97%. Turning to Slide 7, as I noted, average loan balances increased quarter-over-quarter and were higher by 1.3% year-over-year. For the quarter, loans increased at a 2.3% annualized pace. We expect the pace of future loan growth to accelerate over the course of 2024. Loan growth was commercial-led for the quarter with total commercial loans increasing by $691 million. Commercial balance growth included distribution finance, which increased by $352 million, benefiting from normal seasonality.

Auto floor plan increased by $313 million. CRE balances declined by $31 million. All other commercial portfolios were relatively unchanged on a net basis. Within other commercial, we saw notable strength in regional and business banking balances, as a result of sustained production levels and the continued retention of all SBA loan production on balance sheet. In total consumer loans, average balances were flat overall for the quarter. Within consumer, residential mortgage increased by $137 million, benefiting from production as well as slower prepay speeds. Average auto balances declined by $59 million, however increased by $180 million on an end of period basis. RV/Marine average balances declined by $42 million and home equity was lower by $35 million.

Turning to Slide 8, as noted, we drove another quarter of solid deposit growth. Average deposits increased by $1.1 billion in the first quarter. On a year-over-year basis, deposits have increased by $4.6 billion, or 3.1%. Total cumulative deposit beta continued to decelerate quarter-over-quarter and ended at 43%, consistent with our expectations for this point in the rate cycle. Our current outlook for deposit beta remains unchanged, trending a few percentage points higher so long as there is a pause from the Fed and then beginning to revert and fall when we see rate cuts. Market expectations for rate cuts have clearly been pushed out compared to our January earnings call. We continue to believe that there will be rate cuts over time, and the impact of beta will be a function of the duration in this pause from the Fed.

Turning to Slide 9, non-interest-bearing mix shift is tracking closely to our forecast. Average non-interest-bearing balances decreased by $1.3 billion, or 4% from the prior quarter. We continue to expect this mixed shift to moderate and stabilize during 2024. On to Slide 10. For the quarter, net interest income decreased by $27 million or 2% to $1,300 million. Net interest margin declined sequentially to 3.01%. Cumulatively, over the cycle, we have benefited from our asset sensitivity and earning asset growth, with net interest revenues growing at a 6% CAGR over the past two years. Reconciling the change in NIM from Q4, we saw a decrease of 6 basis points. This was primarily due to lower spread, net of free funds, which accounted for 9 basis points, along with a 1 basis point benefit from lower average Fed cash and 2 basis points positive impact from other items, including lower hedge drag impact.

We continue to benefit from fixed rate loan repricing. We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle. And many of our fixed rate loan portfolios retain substantial upside repricing opportunity through 2024 and into 2025. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates, as well as the slope and level of the curve. The basis of our planning and guidance continues to be a central set of those scenarios that are bounded on the low end by a scenario that includes 3 Fed Fund cuts in 2024, which tracks closely to the current Fed dot plot. This scenario is also aligned to the forward curve from the end of March for longer-durated time points.

It’s important to note that the level of the curve in the two-year to five-year term points is an important driver of our asset repricing and spreads. The higher scenario assume rates stay higher for longer with no Fed fund rate reductions this year. This scenario also assumes the longer-durated time points remain at or above the levels at quarter end. In both of these scenarios, as we project further out into 2025, we continue to believe it is most likely that there will eventually be rate cuts at some point as we get into next year. Comparing our latest outlook for those scenarios to the range of outlook we shared in our January guidance, there have certainly been changes given the volatility of rates over the past quarter. Both scenarios now expect Fed funds to stay elevated for longer, which will drive some incremental deposit beta, while the belly of the curve has improved, which will also support asset yields and repricing benefit.

It’s difficult to predict exactly how the rate environment will play out over the course of the year. As we look at the impact of this rate outlook on our business, the fundamental elements of our prior guidance remain unchanged. There’s much of the year left to play out, and as a result, we’re maintaining our range for full year spread revenue growth. At the margin, we’re seeing somewhat higher funding costs as the expected timing of rate cuts has been pushed out. If this plays out for the full year, our view is that the overall NIM outcome could be a few basis points lower than our previous guidance in both scenarios. Importantly, we’re also seeing strong continued deposit growth that is more likely to be at the top end of our deposit growth guidance range, which provides good core funding for our accelerating loan growth.

We continue to see Q1 as the trough for net interest income on a dollar basis. We expect sequential growth in spread revenues from this level during the remaining quarters of the year. We also continue to project that a higher rate scenario will produce a higher overall NIM. In this scenario, we would see a more extended trend of higher deposit beta, and hence overall funding costs would be higher, we would also see an incrementally higher fixed asset repricing benefit. Importantly, our core focus is on driving revenue growth and as I noted we continue to forecast that the combination of this margin outlook, coupled with accelerating loan growth, will drive solid revenue expansion from here. This will support accelerating earnings growth rates as we move throughout this year and continue on into 2025.

Turning to Slide 11. Our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth, as well as our senior note offering and ABS transactions in the first quarter. We expect cash and securities as a percentage of total average assets to remain at approximately 27% to 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short duration HQLA, consistent with our approach to continue to manage the unhedged duration of the portfolio lower over time. We have reduced the overall hedged duration of the portfolio from 4.1 years to 3.5 years over the past seven quarters. Turning to slide 12, you can see an updated outlook for AOCI. Based on the rate environment at quarter end, AOCI moved incrementally higher.

AOCI at quarter end was 21% lower than the levels we saw in the third quarter. Our outlook continues to forecast a substantial portion of AOCI recapture over the next couple years. Turning to Slide 13, we have updated the presentation of our balance sheet hedging program in order to more directly illustrate the intent of the hedging program. This view shows the effective swap profile in the future, including the effect of forward starting swaps, so you can see more directly the hedging exposures as they will play out over the next two years. Slide 43 in the appendix provides the total notional swap exposure similar to our prior reporting. As of March 31, we had $16.8 billion of effective received fixed swaps and $10.7 billion of effective pay fixed swaps.

Our hedging program is designed with two primary objectives to protect margin and revenue and down rate environment and to protect capital and potential up rate scenarios. The pay fixed swaps, which have been effective in protecting capital during this rate cycle, have a weighted average life of just over three years and will begin to mature beginning in the second quarter of 2025. As these instruments mature, our asset sensitivity will reduce. Over time, we intend to gradually add to our down rate protection program at a measured pace. As the rate outlook moved over the course of the first quarter and the yield curve became less negatively inverted, we incrementally added to our down rate protection hedges. We added $3.5 billion of notional forward starting received fixed swaps in the first quarter.

Additionally, through the first two weeks of April, we added another $2 billion of forward starting received fixed swaps. The forward starting structure minimizes near-term negative carry while protecting moderate-term net interest margin in 2025 and 2026. These instruments will also reduce the overall asset sensitivity of the business. We will remain dynamic to manage the hedging and interest rate positioning of the balance sheet, and we may make further changes over time. Our current approach is designed to gradually reduce asset sensitivity throughout the next year and a half, while allowing us to maximize the benefit from the current rate environment. Moving on to Slide 14, our fee revenue growth is driven by three substantive areas, capital markets, payments, and wealth management.

In capital markets, total revenues declined from the prior quarter, driven by lower advisory revenues. Commercial banking related capital markets revenues increased sequentially since troughing in the third quarter. As commercial loan production continues to accelerate, this will support growth in areas such as interest rate derivatives, FX, and syndications. Debt capital markets is also expected to notably benefit over the course of the year. Within advisory, pipelines and backlog continue to remain robust, and we expect advisory to contribute to growth in capital markets revenues over the remainder of the year. Payments in cash management revenue was seasonally lower in the first quarter and increased 7% year-over-year. Debit card revenue continues to outperform industry benchmarks.

Treasury management fees have increased 10% year-over-year as we have deepened customer penetration. We have substantive opportunities across the board in payments to grow revenues over the coming years. Our wealth and asset management strategy is delivering results, with revenues up 10% from the prior year. We are seeing great execution and the benefits of our investments in this area. Advisory relationships have increased 8% year-over-year, and assets under management have increased 12% year-over-year. Turning to Slide 15. On an overall level, GAAP non-interest income increased by $62 million to $467 million for the first quarter, excluding the impacts of the mark-to-market on the pay-fixed swaptions in the prior quarter and the CRT, fees declined seasonally by $12 million quarter-over-quarter.

Our first quarter fee revenue is generally the low point for the year, and we expect non-interest income to grow sequentially from this quarter’s level. Moving on to Slide 16 on expenses. GAAP non-interest expense decreased by $211 million and underlying core expenses decreased by $24 million. During the quarter, we incurred $32 million of incremental expense related to the FDIC Deposit Insurance Fund Special Assessment, as well as $7 million related to our ongoing business process offshoring program to drive efficiencies. Excluding these items, core expenses were marginally lower in the first quarter than we expected, largely due to timing of certain spend on tech and data initiatives, as well as lower incentive compensation. We continue to forecast 4.5% core expense growth for the full year.

From a timing standpoint, we expect core expenses to be higher in the second quarter at approximately $1,130 million. This level should be relatively stable for the third and fourth quarter. There may be some variability given revenue-driven compensation, as well as the pace of expected new hiring activities. This level of expense supports our investments into organic growth strategies as well as data and technology initiatives. Slide 17 recaps our capital position. Common equity tier 1 ended the quarter at 10.2%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.5% and has grown 60 basis points from a year ago. Our capital management strategy remains focused on driving capital ratios higher while maintaining our top priority to fund high return loan growth.

We intend to drive adjusted CET1, inclusive of AOCI, into our operating range of 9% to 10%. On slide 18, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 30 basis points in Q1, 1 basis point lower than the prior quarter. They remain in the lower half of our through the cycle range of 25 basis points to 45 basis points. Allowance for credit losses was stable at 1.97%. Non-performing assets increased approximately 4% from the previous quarter to 60 basis points, while remaining below the prior 2021 level. The criticized asset ratio also increased approximately 3% quarter-over-quarter, with sequential increases slowing quarter-over-quarter. The overall health of the portfolio is strong and tracking to our expectations.

Let’s turn to our outlook for 2024. Overall, our guidance ranges are unchanged. On loans, we expect to drive accelerated growth from the first quarter, totaling between 3% and 5% on a full year basis. This will be driven by solid performance in our core, as well as meaningful contribution from the new teams and market expansions. On deposits, we’re keeping the overall range the same at between 2% and 4%. We do see it more likely to end up at the higher portion of that range based on our momentum and the traction we’re seeing with deposit gathering. Net interest income is expected to be within a range of down 2% and up 2% on a full year basis. As I noted, we see NIM likely a few basis points lower than our earlier guidance. We project spread revenue to expand on a dollar basis from the Q1 level into the second quarter and throughout 2024.

Fee growth strategies remain on track, and we continue to see core non-interest income growth of 5% to 7% for the full year. Expense outlook is unchanged, expecting 4.5% core expense growth for the full year. Credit quality, as I mentioned, is tracking closely to our expectations, and we continue to expect full-year net charge-offs between 25 basis points and 35 basis points. With that, we’ll conclude our prepared remarks and move to Q&A. Tim, over to you.

Tim Sedabres : Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Manan Gosalia from Morgan Stanley. Your line is now live.

Manan Gosalia : Hi good morning. So your comments on the NII guide were very thorough, so I really appreciate that. I think, so the lower end of your guide is now for three cuts, and I think your guide is a little bit more conservative on deposit betas than some of the other comments we’ve heard. So I was wondering if you can expand on that a little bit. Is that based on conversations you’re having with customers or what’s driving that?

Zach Wasserman: Sure, Manan. Thanks for the question. This is Zach. I’ll take that. Broadly speaking, we’re seeing the NIM outcome, but very similar to the view we had before, just as I mentioned, the sort of moderate tuning lower, you know, clearly the biggest change in the environment over the last three months, since we gave guidance in January, was the expectation for a much longer pause in this Fed posture or any rate reductions. And so at the margin, really we’re seeing slightly higher deposit funding costs and overall interest-bearing liability costs. The other thing that’s important, and I’m trying to note this in the prepared remarks as well, is that the deposit volumes are coming in very strong and slightly at the higher end of our prior expectation as well.

And so that’s contributing somewhat, although really good core funding clearly for the accelerating loan growth over time. So that’s really the driver. You know, as we entered the quarter, we [just provide one last piece of color] (ph) on that. As we entered the quarter, the market forward was for the first rate reduction to be in March. We always knew that — that was, we took the view — that was likely not to be the case, but clearly that was the forecast of the market broadly. And we were beginning to execute the early stages of down beta actions. We’ve discussed shortening CD term duration, changing other elements of our pricing. You know, as we went throughout the quarter, clearly that reset. And so we’ve had to continue to be dynamic, as we would always be in managing deposit pricing, and likely now those more substantive downgrade actions will be pushed further out.

So that’s really the biggest driver of it, sort of the timing of when we’ll begin to see more significant downgrade actions. Over time, we would expect to be just as effective going forward as we’ve been in the past on that — and it’s really just, you know, when will that occur? And hence, a few bps of additional funding costs here in 2024.

Manan Gosalia : Now, is any of that because you’re also planning ahead of this accelerating loan growth that you’re expecting?

Zach Wasserman : You know, it’s a good question Manan, but the posture, we’re in this custody moment here, clearly, of when will rate cuts reduce, and also not only when will the first one happen, but what will be the expected trajectory by the market, and by customers really thereafter. For us, we’re very dynamic and granular in how we manage this to really optimize the next best unit of funding here. So continually thinking about when is that rate cut going to happen and obviously attempting to play in front of it. With that being said, we’re talking about marginal tuning here and I wouldn’t overplay it.

Stephen Steinour: And then if I could add, this is Steve. Our commercial pipeline is very robust and each month of the quarter has improved. So we’re going into the second quarter with a very good, healthy outlook. As we think about our guidance for the year, we think on the loan side, we’re going to be closer to the top end, which is in part the consideration for adding the deposits at the rate that we’re doing here at this earlier stage of the year. Manan, thanks for the question.

Operator: Thank you. Our next question is coming from John Pancari from Evercore ISI. Your line is now live.

John Pancari: Good morning.

Stephen Steinour: Good morning, John.

John Pancari: So Thanks for the color on the NII guide. Just to confirm again, it does indicate that you are factoring in a higher for longer environment when all said and done in your outlook. But again, you maintain the NII guide of down 2% to up 2%. Is the primary reason for the maintaining that versus any upside by it would be if it mainly the deposit costs that you just discussed coming in higher, or is there any other factor?

Zach Wasserman : That is the primary driver. So yes is the answer to that. Seeing a little lower, few basis points lower NIM, but incrementally somewhat stronger loan growth, those things are largely offsetting, and continue to see the ultimate results in that guidance range. And importantly, the keeping for us is that trajectory, growing net interest income on a dollar basis out of the first quarter into the second quarter, and continuing on to the third and fourth quarter, and the outcome of that’s going to be solidly expanding revenue growth and solidly expanding profit growth as well. So yes to the fundamentals of your question and the overall outlook, generally unchanged.

John Pancari: Got it. Okay, thanks for that, Zach. And then separately, back to the loan growth topic, Steve, you just discussed that you’ve got confidence in the outlook, particularly given your pipelines. Can you talk about where demand stands now, where utilization is now, and what type of inflection do you see here? Because it seems like you’ve got confidence in the back half strengthening. I mean, what anecdotal data do you have to kind of support that acceleration? Thanks.