Is This Regional Bank a Buy?

Midwest regional bank Huntington Bancshares (Nasdaq: HBAN  ) has reported six consecutive quarterly increases in its earnings. I've decided to put it through the wringer to see whether it deserves space in my portfolio.

Performance
Huntington's asset quality improved as net charge-offs and nonperforming assets declined significantly. This helped the bank reduce its provisions for credit losses, which further translated to a 15% jump in its latest quarter net income.

But there was a dip in the bank's net interest income, owing to a decrease in average earning assets. Its net interest margin also fell, reflecting a reduction in derivatives income and lower loan yields.

As savvy investors, we need to look beyond earnings to decide whether a stock is worth investing in. Let's narrow things down by comparing the company and its closest peers against a few important parameters:

  • Price/earnings (P/E) ratio: This ratio helps us to measure a company's earnings relative to its price, and determine how cheap or expensive its stock is.
  • The price-to-book (P/B) ratio: Widely linked with value investing, and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea about a stock's value and indicates value opportunities.
  • The tier 1 capital ratio: This metric, dividing the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times.
  • The dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.

Take a look at the following metrics to get a better understanding of how Huntington fares in terms of valuation, when compared with its Midwest regional peers.

Company

P/E

P/B

Tier 1 Capital Ratio

Dividend Yield

Huntington

10.48

0.88

12.1%

3.1%

Fifth Third Bancorp (Nasdaq: FITB  )

10.4

0.79

11.9%

2.2%

Northern Trust (Nasdaq: NTRS  )

14.15

1.22

12.8%

3%

Wintrust Financial (Nasdaq: WTFC  )

28.69

0.72

12.3%

0.6%

Source: Capital IQ, a Standard & Poor's company.

Huntington's P/E ratio looks a bit cheap when compared with that of its peers. The low P/E and P/B figures suggest that the market hasn't yet factored in the advantage of its improved credit quality. Its Tier 1 ratio, which comfortably exceeds the Basel recommendation, suggests that the bank is strongly capitalized. Besides, it offers a higher dividend yield than its competitors do. More importantly, its percentage of non-performing loans to total loans is considerably lower than the industry average.

The Foolish bottom line
With improving bottom line and a compelling valuation, Huntington does look like a decent buy. The bank has beaten analysts' earnings expectations for four straight quarters, and it might do it again in the next quarter. To me, Huntington looks incredibly intriguing.

What say you, Fools?

Add Huntington Bancshares to My Watchlist.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of Huntington Bancshares and Fifth Third Bancorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 20, 2011, at 1:56 PM, funfundvierzig wrote:

    In addition, when HBAN begins trading more consistently over $5.00 a share, it may attract more institutional buying. ...funfun..

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