Since the financial crisis, Huntington Bancshares (NASDAQ:HBAN) has doubled the size of its automobile loan portfolio. Unfortunately, there is trouble.
The Midwestern lender is overreaching its bounds in a business line as classic to banks as a '64 Stang.
Huntington's automobile history
Huntington has three ways in which it deals with the automobile industry: financing the building of new dealerships, financing the new and used inventory of those dealerships, and financing customer purchases at those dealerships.
Its automobile financing services date back to the 1950s, a legacy that has enabled the bank to make a name for itself as a reliable lender throughout the Midwest. However, it has begun to expand outside of its area of success.
Having been hit quite hard during the financial crisis, many banks exited the auto financing business entirely. This opened opportunities throughout the country.
Huntington stepped in to fill the gap and within a year expanded its automobile loan portfolio by nearly 40%. The loan volume has been so successful that it enabled Huntington to glean lucrative securitization profits, selling $2.3 billion worth of automobile loans in 2012.
There is only one problem. Many of the new markets that Huntington has entered are outside of its existing footprint -- way outside.
Lack of focus
Currently, out-of-footprint automobile operations exist within New England and the Mid-Atlantic markets.
Huntington believes that it can successfully expand in those areas based on the process it has developed in its current market, concentrating on high-quality originations.
What's the problem with this? It's a lack of focus.
When it comes to any type of business, when you lose your focus, you lose your shirt.
That means we first have to define Huntington's focus. According to its website, Huntington wants to be "THE bank of the Midwest."
Note the emphasis on the geography qualifier -- the Midwest.
The shift in focus away from its current footprint can distract it from its existing operations. At the very least, expanding into new markets introduces new risk as it would to any business. All this aside, there is one particular reason why this expansion doesn't make sense.
Different types of growth
Huntington has some experience with operating outside of its market. The bank offers wealth management services in its primary footprint and Florida.
This makes sense. Wealthy account holders in the bank's six-state footprint retire and move to the Sunshine State. Huntington doesn't want to lose this business, so it makes it convenient for these retirees by locating wealth management offices in Florida.
The same logic does not follow with automobiles.
For wealth management, the expansion it is purely for continuity of service. For automobile financing, Huntington's expansion is all about grabbing new business anywhere and everywhere.
In other words, expanding automobile financing outside of the current footprint does not enhance automobile financing like it does with wealth management.
When it first started expanding, the bank even considered markets in the Southeast and west of the Mississippi. It is this kind of hodgepodge, chase-the-profit opportunity that gets banks in trouble.
Time to refocus
Instead of chasing profits all around the country, Huntington should refocus growth back on its home turf. The automotive industry is doing pretty great right now. That means that Huntington could ride a wave of new business for a while. However, the only reason it was able to expand in the first place was because other banks couldn't handle an economic downturn. The next time the economy takes a dip, an overextended Huntington could retract back to its footprint or worse.