Huntington Bancshares

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Huntington Bancshares Incorporated (HBAN) is a diversified regional bank holding company offering a wide range of financial products and services through a network of branches and digital channels, focusing on consumer, commercial, and private banking in the Midwest.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Huntington Bancshares Incorporated (HBAN) operates as a diversified regional bank holding company, with a primary focus on consumer and commercial banking activities. The company is headquartered in Columbus, Ohio, and has a strong presence in the Midwest region. HBAN’s operations are divided into four segments:

  1. Consumer & Regional Banking: Provides financial services to consumers and small to mid-sized businesses. 2. Commercial Banking: Offers financial solutions to larger businesses, focusing on lending, treasury management, and capital markets. 3. Vehicle Finance: Facilitates lending for the purchase of automobiles, light-duty trucks, recreational vehicles, and marine craft through a network of franchise dealers. 4. Treasury/Other: A function that includes corporate technology and operations, including non-operating assets, liabilities, revenue, and expenses.
  • Revenue Streams: HBAN generates revenue through a mix of sources, including net interest income (NII), fees and commissions, and gains from non-interest activities.
    • NII is the difference between the interest income earned on assets and the interest expense paid on liabilities.
    • Fees and commissions result from services, such as wealth management, investment banking, trust services, service charges and other sources of recurring fees.
    • Non-interest income primarily arises from investment securities, gains from trading and other non-recurring activities.

Competitive Landscape: The banking industry is highly competitive, both on a local and national level. HBAN competes with a wide range of financial institutions including regional and national banks, community banks, and credit unions, and increasingly Fintech companies. Competition is intense to attract deposits, make loans, and earn fees, and is primarily based on interest rates, loan terms, fees, branch availability, and digital capabilities. HBAN also competes with larger banks for the larger, more complex commercial clients.

The bank operates in markets that are very saturated, and the biggest competitors are banks like JP Morgan, PNC and Bank of America, but it also faces regional players like Fifth Third and Keycorp. This gives them less pricing power compared to other more concentrated industries.

What Makes HBAN Different: While Huntington operates like a typical regional bank, the bank has created a “Fair Play” banking philosophy that prioritizes customers, employees, and their communities. It focuses on making banking more convenient and affordable for low and moderate-income individuals and includes programs designed to address inequities. It offers perks like a 24-Hour Grace for deposits, a $50 safety zone for overdrafts, and access to emergency savings and budgeting tools. They are also investing in new technologies and are creating a digitally-powered bank.

This is more of a “unique” culture than anything really special in terms of competitive advantage.

Financials: Huntington’s financial performance is driven by macroeconomic conditions, loan growth, net interest margins, noninterest revenue generation, and cost control. From a revenue breakdown:

  • Net Interest Income represents the largest revenue source. It is sensitive to changes in interest rates.
  • Noninterest income comprises the remaining revenue, which has greater volatility.

  • Credit Quality- In 2023 they had credit losses of $584 million, and increased $37 million or 7% compared to the previous quarter.

    • In Q3 2024, they reported a net income of $476 million ($0.32 earnings per share) compared to $481 million ($0.33 earnings per share) in the same period of the previous year. The change was due to higher provision for credit losses partly offset by higher net interest income. Their net interest margin for Q3 was 2.98%. This also shows the bank has not been able to maintain and improve their margins, which is indicative of a commoditized industry.
    • The bank is also facing pressure from commercial real estate which they believe will impact earnings going forward: “These pressures are expected to continue in commercial real estate, both in terms of credit losses but also in terms of valuation, which will lead to reduced performance from that portfolio. As we manage those properties in the market, we will likely be a bit slower in moving through and monetizing those positions.”

    Other relevant financials are as follows:

    • ROE was 11.9% in Q3 2024
    • Efficiency ratio was 63% in Q3 2024
    • Tangible Common Equity ratio was 7.6% in Q3 2024.
    • CET1 ratio was 9.7% at end of Q3 2024
    • Their total assets were $193.4 billion at the end of Q3 2024

Concerns/Controversies and Problems:

  • A significant concern stems from the bank’s exposure to commercial real estate, which they acknowledge might increase future loan losses, and lower their earnings from that sector. The company believes they have a prudent approach to that risk but cannot completely guarantee that nothing could affect their revenue streams in the future.
  • They are experiencing higher average borrowing costs for the funds. As their yield on deposits increase, their margins may suffer if they are not able to pass it on to borrowers.
  • They have had a significant increase in provision for loan losses ($181M), which could signify some trouble in their lending portfolio.

Moat Rating: 2/5 Huntington possesses a narrow moat at best. The banking industry’s highly regulated and commoditized nature makes it extremely difficult to build a wide economic moat. While HBAN’s focus on customer experience and brand identity (particularly with lower-income communities) does give them a local and loyal customer base, it’s not enough to guarantee sustainable competitive advantages. While they do have the convenience of physical branches, they operate in the midwest with other huge players in the banking industry, which limits their scalability and growth potential. Their switching costs are also relatively low, as it is usually easy for consumers to switch banks. These factors point to a narrow moat and one that is not strong compared to the wider industry.

Risks to the Moat and Business Resilience:

  1. Interest Rate Risk: HBAN’s profitability is susceptible to fluctuations in interest rates.
  2. Credit Risk: Exposure to loan defaults, especially in the commercial real estate sector can cause major losses.
  3. Competition: Increasing competition from other banks and FinTech companies makes it difficult for growth.
  4. Regulatory Risk: Changes in regulations can force additional costs, and limit growth potential.
  5. Macroeconomic Risk: Recession or negative economic conditions will depress consumer spending, lowering growth potential.
  6. Cybersecurity risk: Banks are targets for online attacks, they are investing in cybersecurity but may be unable to completely defend against cyber attacks.

Despite these risks, Huntington demonstrates some resilience through:

  • Regional Diversification: It is in a large geographic region, not tied to one single region of the economy.
  • Customer focus: Emphasis on customer-centric banking will result in greater client loyalty over time.
  • Digital capabilities: They continue to invest in their digital infrastructure, which will be essential in the future.

Understandability: 3 / 5 HBAN operates in a reasonably complex industry but the core business itself is fairly easy to understand. However, evaluating the bank’s performance requires analysis beyond simply their financial statements, including analysis of their credit risks, capital, and liquidity. Their recent acquisitions also adds complexity, making this a middle of the road business in terms of understandability.

  • Easy to understand: Basic Banking operations, loaning out and getting deposits.
  • More complex: Understanding all the regulations, accounting, and financial metrics for the bank.
  • Further complexity due to the multiple acquisitions over the recent years, making it hard to compare year over year financial results.

Balance Sheet Health: 3 / 5 HBAN’s balance sheet is okay, but there are some factors that may hurt the overall health of the business. They have a decent debt to equity and liquidity ratio, but the increase in provisions for credit losses and potential problems in the commercial real estate market are concerning.

  • Positive:
    • Strong assets of $193 Billion.
    • Moderate debt to equity ratio
    • Concern
      • A significant increase in provisions for loan losses.
      • Exposure to commercial real estate.
      • Rising interest expenses, impacting net interest income.

    All things considered, HBAN’s balance sheet is solid, but has some potential problems that need to be watched carefully.