Fee Income to Aid Huntington (HBAN) Q3 Earnings Amid Low Rates
Huntington Bancshares HBAN is slated to report third-quarter 2020 results on Oct 22, before the opening bell. The company’s results are projected to reflect a year-over-year decline in earnings, while revenues will likely reflect growth.
In the last reported quarter, the bank’s earnings beat the Zacks Consensus Estimate. Decline in operating expenses and a higher fee income were tailwinds. Notably, a rise in mortgage banking revenues acted as a driving factor. However, results were adversely impacted by higher credit provisioning due to the bleak economic conditions. Also, a lower net interest income, along with pressure on margin, due to low rates, was a major drag.
Huntington’s earnings estimate revisions have been showing analysts’ optimistic stance. The Zacks Consensus Estimate for earnings of 24 cents has moved 20% upward over the past 30 days. This, however, indicates a 29.4% plunge from the year-ago period.
Nevertheless, the consensus estimate for sales of $1.23 billion suggests a rise of 3.24% from the year-earlier quarter. Notably, management expects total revenues to increase about 2% sequentially.
Huntington Bancshares Incorporated Price and EPS Surprise
Huntington Bancshares Incorporated price-eps-surprise | Huntington Bancshares Incorporated Quote
Before we take a look at what our quantitative model predicts, let’s check the factors that might have influenced the third-quarter performance.
Key Factors at Play
Soft Net Interest Income (NII) Growth: The overall lending scenario was decent during the July-September quarter, with commercial and industrial, along with real estate loan portfolios having offered significant support. Conversely, as consumer sentiment dipped amid the coronavirus crisis, demand for consumer loans was hit hard.
Management expects average loans to have been flat on a linked quarter basis. Consumer loans are expected to reflect a 2% increase on continued growth in the residential mortgage and RV and marine lending. Commercial loans might display a nearly 1% decrease as the full-quarter impact of Payment Paycheck Program (PPP) is more than offset by continued reductions in dealer floor plan and commercial loan utilization rates. The company assumes that the majority of PPP balances will remain on the balance sheet through the end of 2020.
Further, the near-zero interest rates are likely to have hurt Huntington’s NII in the third quarter as well. Also, this is likely to have resulted in a contraction in NIM. Nevertheless, low deposit costs and higher average interest earning assets might have been offsetting factors.
Thus, low rates and a soft lending scenario are likely to have curtailed NII growth to some extent. However, the Zacks Consensus Estimate for average interest earning assets of $110.4 billion for the quarter calls for a 1.3% sequential improvement, while the same for NII (tax equivalent basis) indicates a 3.5% rise to $825 million.
On a sequential basis, management anticipates NII to increase 2-4%. GAAP NIM is anticipated to reflect an expansion of 7-10 basis points (bps) versus the second-quarter NIM of 2.94%, as a result of the hedging strategy and the elimination of notable items, which had hurt the bank in the prior quarter. The NIM projection does not include material benefit from the acceleration of PPP fees from the repayment of forgiveness of those loans in the third quarter.
High Non-Interest Revenues: Historically-low mortgage rates led to a significant rise in refinancing activities during the September-end quarter with growth in new originations. The consensus estimate of $101 million for mortgage banking revenues suggests a rise of 5.2% sequentially.
Also, improved consumer spending is likely to have supported the company’s card fees. The Zacks Consensus Estimate for cards and payment processing revenues of $62 million suggests a 5.1% rise from the prior quarter. Yet, the consensus estimate for insurance income is pegged at $23.3 million, indicating 6.8% fall on a sequential basis.
Moreover, while a substantial rise in client activity and higher market volatility supported trading revenues during the to-be-reported quarter, subdued investment banking performance was an undermining factor. Thus, the company’s capital markets fees are likely to have been soft. The Zacks Consensus Estimate for the same calls for a 2.2% decline from the prior quarter to $30.3 million.
Overall, total non-interest income is likely to have increased during the quarter. The consensus estimate of $401 million for the same suggests a jump of 2.6% quarter on quarter.
Management anticipates fee income to be flat as mortgage banking activity remains robust and the pandemic-impacted revenues rebound. Based on the debit card trends, the company expects card-related fees to have picked up marginally in the third quarter. Increasing deposit account activity volumes might have aided the bank as well.
High Expenses: Management expects expenses to have flared up 5% on a linked quarter basis. About 2% of this growth is driven by the $15-million restructuring costs associated with the expense-management actions. The remaining 3% is driven by investments in technology and marketing, as well as the return of customer and sales activity closer to pre pandemic levels.
Asset Quality: Having already built quite significant in the September-end quarter because of further worsening of the operating backdrop since the end of March, Huntington is less likely to have recorded substantial increase in provision for loan losses in the third quarter. However, non-performing assets and loans might have escalated on the coronavirus crisis.
The Zacks Consensus Estimate for total non-performing assets and non-performing loans of $1.1 billion and $972 million, respectively, indicates rise of 50.1% and 50%, respectively, from the prior quarter.
Further, the company expects net charge-offs to be near 65 basis points. This should take into account the ongoing pressure in the oil and gas portfolio, as well as broader economic considerations.
What Our Quantitative Model Reveals
Huntington has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Huntington is +3.47%.
Zacks Rank: Huntington currently carries a Zacks Rank of 3, which further increases the predictive power of ESP.
Other Banks Worth a Look
Here are a few other bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for CullenFrost Bankers, Inc. CFR is +2.61% and the stock carries a Zacks Rank of 3, at present. The company is slated to report third-quarter numbers on Oct 29. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
New York Community Bancorp, Inc. NYCB is set to release earnings figures on Oct 28. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +4.8%.
BankUnited, Inc. BKU is scheduled to announce quarterly results on Oct 28. The company has an Earnings ESP of +13.29% and currently carries a Zacks Rank of 3.
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