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

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%.


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.


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.

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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.

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