On Nov 8, 2013, we maintained our Neutral recommendation on Huntington Bancshares Inc. (HBAN). The reaffirmation was based on better-than-expected earnings and an improved credit quality. However, revenue headwinds are a concern. Further, sluggish economic recovery and a tough regulatory environment will likely limit the bank’s earnings growth in the quarters ahead.
Why Neutral?
Huntington’s third-quarter 2013 earnings came in at 20 cents per share, which beat the Zacks Consensus Estimate by 17.6%. Further, results surpassed the prior-year quarter figure by a penny.
Huntington’s performance was driven by lower-than-expected provision for credit losses and decline in expenses. However, lower revenues due to fall in net interest income and non-interest income was the headwind.
Following third-quarter 2013 results, over the last 30 days, the Zacks Consensus Estimate for 2013 advanced 2.9% to 70 cents as 12 of the 15 estimates moved north. For 2014, the Zacks Consensus Estimate rose 2.9% to 72 cents since 7 of the 16 estimates moved upward. Currently, Huntington carries a Zacks Rank #3 (Hold).
We are impressed by the turnaround made by Huntington since the beginning of 2009. The company has reorganized its business model, implemented a strategic planning process, and strengthened its management team to drive growth.
These strategic changes, along with opportunistic acquisitions, have helped Huntington to increase market share and thereby enhance profitability in the long run. Additionally, the company’s favorable capital deployment activities make it a sound asset for yield-seeking investors.
However, we remain concerned about the pressure on Huntington’s net interest margin due to a persistent low interest rate environment. The company’s increased costs and its inability to generate positive operating leverage are other challenges. Additionally, regulatory upheavals and a sluggish macroeconomic environment are expected to dent the company's profitability going forward.
Other Stocks to Consider
Better-placed Midwest banks include PrivateBancorp, Inc. (PVTB), First Interstate Bancsystem Inc. (FIBK) and German American Bancorp Inc. (GABC). All these stocks carry a Zacks Rank #1 (Strong Buy).
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