2 Things to Consider Before Buying Huntington Bancshares

Huntington's performance is evident by its fast rising share price, but is there anything that can slow the bank down?

Jul 25, 2014 at 2:28PM
Huntington

Source: Company.

Huntington Bancshares (NASDAQ:HBAN) has been on a tear the last two years with shares up more than 60% since the start of 2013. During this time, efficiencies have improved, and a healthy buyback program has been in place to offset the $91.7 million in shares issued to close the Camco Financial acquisition at the beginning of the year.

To be upfront, the headlines have been attractive, and my intentions for this article were to find weaknesses that may be hiding in the bank's financial statements. Sometimes the worst time to buy is when all cylinders are firing, and my search has uncovered a few things all investors should consider when evaluating an investment in the bank. So, here are my two reasons for NOT buying shares of Huntington Bancshares.

1. Little dry powder
Huntington has had its return on assets above 1% for some time, but this has required the deployment of every tangible one. Over the past year, loan growth has outpaced the flow of incoming deposits, moving the loan to deposit ratio up to 93%.

Powder

Flickr / Chad_k.

This may not sound like anything to worry about, but it means that current profitability levels are dependent on maintenance of this high ratio, and that future growth will rely on the bank's ability to attract even more deposits, something that could also affect profitability if that translates into having to pay a higher rate on deposit accounts, or slicing service fees that are high at 28% of all streams of non-interest income (approximately $70 million each quarter).

On top of this, management has "locked up" more than 30% of the $11 billion in investment securities by classifying them as held-to-maturity.

This was done in accordance with GAAP accounting and is meant to communicate management's intentions, but it also hides future value swings related to rising interest rates.

Regulators may like this because it implies these assets are being stored away for rainy days, but it also means they will be overvalued on the balance sheet if and when rates start to move up (and they have been by as much as $75 million at the end of last year).

2. Expensive shares
Performance ratios look good, but shares trade at 1.5 times tangible book value and a P/E of 13.6.

This may not sound too overvalued, but growth from here looks limited -- and we are probably more than a year away from seeing earnings get to $1 a share.

Just reported, Huntington's nonperforming loan balance came in at $447 million, which is 10% better than the balance shown at the same time last year. At 0.79% of all assets, the threat that the nonperforming loans present is low and covered almost two times over by the allowance account that stands at $692 million.

Park

Flickr / philip taylor.

This is all good, but it's important to remember that allowances as a percentage of total loans have come down to 1.5%, which is a percentage most regional banks like to maintain.

For instance, KeyCorp (NYSE:KEY) is in a similar position with an allowance as a percentage of loans ratio of 1.46%. Going forward, maintaining this ratio as the bank grows assets will require higher provision expenses that haven't been seen for more than a year. In fact, reserve releases amounting to $85 million over the past four quarters is equivalent to half of this quarter's net income.

It's nice that assets are improving, but this is some earnings help that can't be expected to continue indefinitely.

Bottom line
There's no denying the fact that Huntington Bancshares has improved and is growing quickly, but capacity for more looks limited, and this year's success will depend on how fast the bank can put to work its newly acquired assets.

Because of this, shares look more like a hold than a buy for new investors looking to get into the banking industry.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

joshua kubiak has no position in any stocks mentioned. The Motley Fool owns shares of Huntington Bancshares and KeyCorp. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers