Let's start off with a quote from one of the best CEOs in the banking biz right now:
There are only three ways a company can grow. First, earn more business from your current customers. Second, attract customers from your competitors. Or third, buy another company. If you can't do the first, what makes you think you can earn more business from your competitor's customers or from customers you buy through acquisition?
That was CEO of Wells Fargo (NYSE: WFC) John Stumpf, and he knows a thing or two about banking.
Stumpf unknowingly gives us a commentary on what's driving the growth of a Midwestern lender headquartered 2,500 miles away from his San Francisco office -- Huntington Bancshares (NASDAQ:HBAN).
This is why I believe that commentary is telling us Huntington is a buy today.
Let's start with Huntington's go-to source for growth for the past 50 years or so: Acquisitions.
Acquisition is arguably the quickest way to growth for a bank. Take for example Huntington's 2006 purchase of Unizan Financial Corp. and 2007 purchase of Sky Financial Group. Those two purchases alone gave Huntington's balance sheet a $5 billion bump at a time when total assets were around $40 billion.
Beware, though. Acquisition has one distinct pitfall: Overpayment.
Unfortunatley, this is exactly what Huntington did going into the financial crisis, a move that ended in a massive $2.6 billion goodwill impairment.
Even with Huntington's less than stellar acquisition track record as of late, it still remains a vital part of Huntington's future growth. So far this year, the bank has purchased 24 branches from Bank of America as it makes a push into Michigan.
Whether Huntington's acquisition process has gotten smarter is still to be seen, but what's for sure is that Huntington has begun to develop and put a heavier emphasis on more stable forms of growth.
Attract customers from competition
This is the classic growth strategy -- do things better than your competitors, and steal their customers. However, in a highly commoditized industry like banking three words come to mind for this growth avenue: slow, risky, and expensive.
Gaining market share in the banking industry typically involves boosting customer service related expenses. This costs a lot of money, takes time to take effect, and at the end of the day, it might not even work.
Within a year of realizing its acquisition process had gone awry, Huntington doubled its marketing expenditures and launched a massive marketing campaign across its six-state footprint that touted the bank's customer-friendly policies.
So far, the efforts seem to be paying off for Huntington.
Not only has it been able to increase overall deposits by nearly 13% with an increase of 331,699 consumer households, but also Huntington has been able to revamp its deposit base in the process.
Between 2010 and 2013, the bank shrank its reliance on expensive wholesale funding while increasing its core deposits by $5 billion. Furthermore, the majority of that core deposit increase was from non-interest demand deposits, the loan-making funds a bank does not have to pay for.
Increased deposits costing less will definitely add to Huntington's bottom line, but increased expenses will eat into profits. So, let's move on and take a look at the low-cost option with virtually no downside that has led growth at Wells Fargo and is now doing the same at Huntington.
Earn more with current customers
There's a reason Stumpf says you should master this area of growth before you pursue the other two. Cross-selling, or selling more products to existing customers, is the primary engine for growth in the banking industry.
Huntington calls it the Optimal Customer Relationship (OCR) and since its genesis in 2010 has brought the number of households using six or more products to 47.6%.
This is pretty impressive when you consider Stumpf's Wells Fargo, an industry leader in cross-selling among the big banks, whose Going for Gr-Eight initiative boasts a current cross-selling rate at 6.17 products per household.
Integrating processes across business segments has been the key to Huntington's OCR, giving it a competitive advantage over other banks. As it continues to streamline these processes, it will only enhance the growth brought on by acquisition and increases in market share.
Growth like Wells Fargo?
Let's recap: Huntington has three areas driving growth with a huge leg up in the most promising area. It is additionally following the same successful strategy that has helped Wells Fargo's stock price exceed pre-recession levels.
Obviously, there is more to the Wells Fargo story, and smart strategies alone don't warrant a buy for either bank. That's why we need to look at Huntington's value today.
The bank currently sits at a price-to-book ratio of 1.4. Even when we factor out any stupidity that Huntington might enter into the acquisition equation (remember the overpayment pitfall!), its price-to-tangible book at 1.5 still sits well below the 2.2 average for regional Midwestern banks.
Combine this with the fact that Huntington has been cranking out a reliable 10.8% return on equity the last three years, and the picture becomes clearer.
Wells Fargo's stock price shows it has figured out growth in the past. Huntington's fundamentals say it has figured it out for the future. Continue to grow the book, keep the ROE at its current acceptable and sustainable level, and that is a formula for a good investment today.