The Ohio-based regional bank Huntington Bancshares (NASDAQ:HBAN) has been an industry darling of late. Since absorbing a near fatal loss related to its pre-crisis acquisition of Sky Financial, it's recapitalized itself through a new, albeit highly dilutive, share offering, hired a new CEO, and gotten back into the growth business.
But if this quick turnaround seems too good to be true, then you wouldn't be the only one that's worried about Huntington's prospects. As a previous Huntington bull, I can't help but admit that my feelings toward the bank are changing -- and they're doing so for three reasons.
1. Reckless growth-by-acquisition strategy
There are certain things that good banks just don't do. One of them is to overpay for acquisitions. Doing so is senseless. There's just no other way to put it. Every decade or so, a banking crisis comes along that allows strong lenders to pick up their weakest competitors for pennies on the dollar, if not entirely free of charge. And many times, though this isn't a coincidence, the latter group consists of banks that violated this very axiom.
You'd be excused for thinking that the executives at Huntington had learned this lesson. The Sky Financial deal closed in 2006. And despite the fact that it brought Huntington to the brink of failure less than two years later, Huntington nevertheless paid Sky Financial's shareholders a 25% premium for the stock. The only analogy that comes close to this was Bank of America's (NYSE: BAC) horrendous decision to buy Countrywide Financial at the beginning of 2008.
I was thus dismayed to hear that Huntington's leadership seems to be committing the same mistake all over again -- though, to be clear, there's no reason to believe that the downside this time around will be anything like that in the Sky Financial transaction. At the beginning of last month, the bank announced its decision to purchase Camco Financial, the parent company of Cambridge, Ohio-based Advantage Bank, a 22-branch lender with presence in Ohio, Kentucky, and West Virginia. The deal contemplates a share price of $6, or roughly 50% higher than Camco's pre-announcement level.
CEO Stephen Steinour explained the move by saying that it's a "great opportunity to enhance our presence in several areas within our existing footprint and to expand into several new attractive geographies." For the record, this is uncomfortably similar to the explanation offered by Huntington's former CEO, Thomas Hoaglin, upon announcing the decision to acquire Sky Financial.
The point here is not that Camco will harm Huntington to the same extent as Sky Financial did. To Steinour's point, it may even turn out to be a decent deal. The point is rather what it says about Steinour's patience and appreciation for cycles. Good bankers are patient. They wait and watch for years, if not decades, to pounce on acquisitions that can be had for little to no capital. Meanwhile, bad bankers are impatient and incapable of waiting. Which category will Steinour ultimately end up in remains to be seen, but the Camco deal certainly puts the latter into contention.
2. Equally reckless branch expansion
If there's one trend that's evident throughout the banking industry, it's the move toward a smaller, more efficient physical footprint. "[T]he consumer [banking] business has been permanently altered as a result of the regulatory reforms, evolving customer expectations, adoption of new technology, and the recovering economy," explained the CEO of Huntington's Ohio-based competitor Fifth Third Financial at an industry conference earlier this year. The net result has been dramatically reduced revenues, which is necessitating aggressive expense reductions at lenders across the country.
One of the most effective ways to cut expenses is to "optimize the distribution network" -- that is, to reduce the number and size of branches. At the same conference, the CEO of KeyCorp (NYSE:KEY) said that it had "originally set out to consolidate 5% of our franchise by the end of the year and now believe the number is closer to 7%." And the head of PNC Financial (NYSE:PNC) told analysts that it will "close up to 200 traditional branches this year."
What's this have to do with Huntington? Over the past three years, the bank has announced plans to do precisely the opposite. Through partnerships with two regional supermarkets, it's in the process of adding 200 in-store branches to its footprint -- though, Huntington is also "pruning" its network of stand-alone locations, albeit at a much slower pace.
On the one hand, it's hard not to admire Steinour's courage to go against the crowd. Very few companies achieve success by following in the footsteps of others. According to Huntington, the economics of in-store branches is significantly better than traditional units. As Steinour noted on the most recent conference call, "We're seeing transactional behavioral shifts benefiting the in-stores just because of the extended hours and 7-day-a-week program." Additionally, the bank has succeeded at growing its customer base. In the third quarter, its customer count (as measured by households) increased by 9.2% compared to the same three-month period last year.
Yet, I can't help but wonder whether Huntington has picked the wrong battle in which to wage its independence. We know that revenues are falling across the industry. And we also know that customers are increasingly turning to their mobile phones and computers to execute financial transactions. As a result, expanding one's branch base as opposed to, say, taking the lead in the mobile space seems to be the worst type of contrarian move.
3. Even more inexcusable neglect of mobile banking
Along these lines, the third reason that I've become dismayed with Huntington over the last year is that there's little evidence it's embracing the new distribution platforms for financial products. And by this I mean mobile.
Because mobile banking is still in its infancy, it's impossible to predict just how significant it will ultimately become. Yet, we know two things with a high degree of certainty. First, speaking from my own personal experience as well as my knowledge of the industry, consumers are eagerly adopting this delivery platform at an accelerating pace. And second, it's a much more efficient way to deliver financial services than through, say, bank tellers in a physical branch. In other words, there's simply no reason not to go after this as an alternative channel.
So, where is Huntington on the mobile front? According to its former CFO, who is now at KeyCorp, not very far -- or, at least, not as far as his new employer, which, by the way, isn't known to be overly technologically savvy itself. To cite merely one example, despite the fact that many of its competitors offer the ability to deposit checks through their mobile phones, Huntington's mobile platform still appears to revolve around texting. To put it succinctly, things like this would have to change before I would ever consider owning Huntington's stock, much less becoming one of its customers.
Finding an alternative to Huntington
At this point, if I've done my job, you're probably not overly enthused at the prospect of owning shares in Huntington. And to a certain extent, that's fair. But I would nevertheless urge you to think long and hard before making any changes to your portfolio based upon this article alone.