Today we continue our Q1 regional bank coverage with Huntington Bancshares Incorporated (NASDAQ:HBAN). We continue to monitor the space closely. There remain macro concerns and pressure on net interest margins, while bank asset quality so far in the banks we follow has been mixed.
The largest concern is a higher for longer rate environment, eroding loan demand, and keeping the cost of deposits high. That said, monitoring the regional banks provides great insights into the real health of the economy. Now we know every bank is different, but taken as a collective we get a picture of loan demand, what is going on with deposits, and if people are falling behind on loans.
We still like HBAN for income. We expect choppy trading in the next few months as rate cuts are now in question, but we still like taking advantage of weakness to invest in this bank with a great dividend. It offers a near 5% yield while you wait for more stabilization. Let us discuss the just-reported Q1 earnings.
Huntington Bancshares Q1 earnings headline performance
Huntington Bancshares saw its top-line results fall 9.3% from last year to $1.75 billion, but this surpassed consensus by $10 million. This was also a $30 million increase sequentially from Q4 2023. On the earnings front, Huntington Bancshares also exceeded expectations. The bank reported a Q1 net income of $419 million, down from $602 million a year ago, but up $176 million from the sequential Q4. Adjusted earnings per common share were $0.28, beating by $0.03.
Loan and deposit growth
Both loans and total deposits are experiencing healthy growth here, bucking the overall trend we have seen so far for the regional banks we have examined. One of the key indicators of a strong bank is its ability to grow loans and deposits, and Huntington continues to enjoy growth in both of these key metrics. Average total deposits increased $1.1 billion, or 1%, from the prior quarter and $4.6 billion, or 3%, from last year's Q1. This is stellar. Keep in mind new loans issued are at higher rates, and that will help long-term margins, while the growth in deposits helps with liquidity for future investment. While it is true deposits are more expensive, when rates are cut, the yield on deposits will fall.
We like HBAN as loan balances continue to grow year-over-year. Average total loans and leases increased $701 million from the sequential fourth quarter to $121.9 billion, and increased $1.5 billion, or 1%, from the year-ago quarter.
We are on record with the assertion that margins have bottomed out in the sector. So far, it's been mixed, with some net interest margins rising, some flat, and others down modestly, depending on the bank. And net interest income and margins took a hit. Net interest income here at Huntington dipped $52 million, or 4%, from the prior quarter, and decreased $29 million, or 2%, from Q4. Unsurprisingly, it was down $122 million from last year's Q1. Net interest margin did slip to 3.01% from 3.07% in Q4. However, in the Q1 presentation, management indicated they now expect net interest income dollar growth sequentially throughout 2024. This is very positive.
Huntington Bancshares asset quality
Asset quality metrics were mixed. Net charge-offs were 0.30% of average total loans and leases for the quarter, improving from 0.31% in Q4. We continue to watch this key metric and we were pleased to see it improving. Nonperforming assets had declined for two years straight until Q3 2023. That said, the allowance for credit losses was flat from Q4 at $2.4 billion, or 1.97%, of total loans and leases at quarter end. However, the nonperforming assets to total assets rose from 0.58% in Q4 to 0.60% in Q1.
Efficiency has always been strong here, though back in Q4 the bank's efficiency ratio hit 77.0%. It improved dramatically to 63.7% here in Q1. We expect this metric to make its way back under 60% this year., especially with sequential growth expected in net interest income.
Huntington Bancshares valuation
From a valuation perspective, Huntington Bancshares Incorporated's share price at $13.0 still remains relatively attractive based on the metrics we follow. We have a compelling dividend yield of 4.7%, largely outperforming bond yields. HBAN is trading at 10.5X forward earnings and 1.33 adjusted tangible book value, which is pretty attractive, but not as strong as we have seen in the past. We think new money should wait for $12 or less.
Take home
The rise in the cost of funds is topping off, while future loans will be at higher yields and take the average yields on interest-earning assets higher as we move forward. This should help margins. When rates are cut, the cost of deposits will fall. We expect efficiency will improve, and asset quality is holding up despite a tough macro.
Overall, we are Hold rated for Huntington Bancshares stock, but think new money should consider buying at $12 and under. There are also many ways to ramp income using options. In summation, this was a solid quarter for Huntington Bancshares Incorporated.
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