The Hidden Reason for Optimism at Huntington Bancshares Incorporated

Huntington Bancshares (NASDAQ: HBAN  ) couldn't keep up with peers Regions Financial (NYSE: RF  ) and KeyCorp (NYSE: KEY  ) in on essential measure. But first glance is deceiving, and a dive beneath the surface reveals there is reason for optimism with Huntington.

Trailing competitors
Regional banks like Huntington, Regions Financial, and KeyCorp are often much less complex than the "big four" banks that have trillions in assets. As a result, they're often easier to compare.

They make their money through net interest income, which is the difference between what they receive in interest from loans they issue versus what they pay out on deposits, bonds, and other forms of borrowing. And the rest comes through fees known as noninterest income.

Often the biggest banks have a roughly 50/50 split between net interest income and noninterest income, whereas the three banks mentioned above are much more dependent on the difference between what they take in, versus what they pay out:

Net Interest Income as a % of total Revenue

Huntington Bancshares

64.1%

Regions Financial

65.1%

KeyCorp

56.7%

Source: Company Investor Relations. 

As a result, it's important to see just how well these banks are doing at increasing revenue by issuing loans. While there are dangers from lending to those they shouldn't, seeing a growth in loans is encouraging.

But it isn't just mortgages and auto loans, as these banks are dependent on commercial loans -- those made to mid-sized companies -- with more than half (and nearly three quarters in the case of KeyCorp) of the total loans they issue being made to those businesses:

Commercial Loans as a % of total loans

Huntington Bancshares

52%

Regions Financial

53%

KeyCorp

71.2%

Source: Company Investor Relations.

With all that in mind, one of the troubling things about Huntington Bancshares is its loan growth in this critical business comes in at roughly half the rate of its peers:


Source: Company Investor Relations.

As a result it's easy to think Huntington is in trouble, but it is here where a dive beneath the numbers is critical, as there is reason for optimism.

The bright spot
One of the things Huntington has harped on over the last few years is its desire to build deeper relationships with its existing clients, known as its Optimal Customer Relationship, or OCR. This allows it to offer a full suite of products to customers extending beyond loans to money management through its treasury services as well as helping firms issue their own bonds and equity.

One of the encouraging things about Huntington is that it has done a remarkable job at developing deeper relationships with its customers, as shown in the chart below:


Source: Company Investor Relations. 

And these deeper relationships have resulted in huge increases in revenue, because while its total relationships have grown by just 2.5% over the last year, its revenue is up 12.5%, from $175 million to $197 million.

The Foolish bottom line
At times we are led to think the only way a bank can grow is through issuing more loans to more customers. But Huntington Bancshares is a powerful example of a bank that is seeking not simply to widen its base of clients, but instead have deeper relationships with them.

This strategy may not be typical, but it is succeeding, and this could continue to mean big things for both it and its shareholders in the years to come.

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