In a regulatory filing with the Securities and Exchange Commission (SEC) late last week, Huntington Bancshares Inc. (HBAN) has expressed a positive outlook for 2011. The company anticipates the economy to remain relatively stable in 2011 with an improvement in the second half of the year.
From an earnings perspective, Huntington expects this to be a transitional year. The company projects its 2011 pre-tax, pre-provision income to remain relatively stable with that of the second half of 2010, or about $260–$265 million per quarter and anticipates a return to growth in 2012, if not earlier.
Huntington expects net income to grow in 2011, primarily on a reduction in provision for credit losses. Absolute levels of net charge-offs, nonperforming assets, and criticized loans will continue to decline, thereby reducing provision expense. Additionally, earnings might benefit from a growth in net interest income.
While the above expectations are encouraging, revenue headwinds due to regulatory and legislative actions remain concerns. Fee income is anticipated to be adversely affected by a full-year’s impact of Reg E, lower interchange fees, and a decline in mortgage banking revenues.
Though the company’s cross-selling initiatives and other strategic efforts are expected to support other fee income categories, continued investments in business growth initiatives would represent challenges to earnings growth as expenses are likely to rise.
TARP Repayment
In December 2010, Huntington repurchased all $1.4 billion of the Series B Fixed Rate Cumulative Perpetual Preferred Stockit issued to the Treasury as a part of Troubled Asset Relief Program (TARP). The company also bought back the warranties it had issued to the Treasury for $49.1 million. The company issued $920 million of common stock and $300 million of subordinated debt and used the net proceeds along with existing cash for the bailout repayment.Besides Huntington, another regional bank – First Horizon National Corp. (FHN) also repaid its TARP dues in December.
The TARP repay is a positive for the stock. While the stock offering would have a dilutive impact, the company will not have to pay TARP dividends any longer.
Fourth Quarter Recap
In January, Huntingtonreported fourth quarter 2010 profit of $122.9 million or 5 cents per share. Results came in below the Zacks Consensus Estimate of 8 cents per share. The results, however, included a one-time reduction of 7 cents per share for the deemed dividend resulting from the repurchase of $1.4 billion in TARP capital in December.
Quarterly results at Huntington reflect a significant reduction in loan loss provisions and better-than-expected growth in revenue. Nonperforming assets and net charge-offs continued to decline.
The year 2010 has been one of turnaround for Huntington. The company, which was once plagued by significant souring loans and problem assets, was able to return to profitability in 2010. For the full year, Huntington reported net income of $312.3 million or 19 cents per share compared with a net loss of $3.1 billion or $6.14 per share in 2009.
Our Take
The turnaround story at Huntington is impressive and the company is progressing well with its strategic initiatives. Efforts to strengthen its balance sheet and reorganize its business should help the company tide over the current credit cycle and support earnings growth going forward. However, legislative actions are posing challenges for fee income growth. Also, we do not expect any substantial improvement in the top line in the first half of the year as economic growth is still in its nascent stage.
Huntington shares currently have a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also have a Neutral recommendation on the stock.
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