Huntington Bancshares

Huntington Bancshares reported disappointing second-quarter results, with net interest margin contracting 4 basis points sequentially to 3.21%. The stock fell by midsingle digits after the earnings release on July 23.

Why it matters: The market is concerned about the net interest income trajectory and rising deposit costs, amid management guiding 2026 NII to come at the bottom end of its initial 39% to 43% growth guidance range or modestly below, worse than the first-quarter update of toward the low end of the range. The bank attributed higher deposit costs to a shift in rate expectations, from cuts to hikes in the federal-funds rate, and to stronger deposit competition. Both factors apply industrywide, but its 8-basis-point sequential increase in interest-bearing deposit costs was the worst among banks under our coverage. We plan to decrease our 2026 NIM forecast by 3-4 basis points to reflect higher deposit funding costs. We previously raised our long-term deposit funding cost forecast for regionals under our coverage ahead of second-quarter earnings and don't expect a significant change to our long-term NIM of 3.09% for the bank.

The bottom line: As we incorporate the bank's latest results and updated guidance, we don't anticipate making a material change to our $18.60 fair value estimate for no-moat-rated Huntington. We view shares as fairly valued at current prices. Although Cadence has bolstered a strong growth runway in the balance sheet and fee income, we think management's $1.90 to $1.93 2027 EPS target is too ambitious. Management's guidance includes revenue synergies we don't incorporate because they will be difficult to achieve. Our previous adjusted 2027 EPS forecast is about 7% lower than the midpoint of the guidance range.

Huntington concluded its Cadence systems and account conversion in June, the last step in the integration process. The bank had $152 million in pretax notable items related to this acquisition. We anticipate lower one-time charges related to Cadence going forward and believe that the first half of the year was the outlier for notable acquisition expenses, given the conversion has now been completed. The bank is on track to achieve its $365 million cost-saving targets in the fourth quarter, but we expect the majority will be reinvested into the bank franchise.

Huntington reported an adjusted common equity Tier 1 ratio, including accumulated other comprehensive income, of 9% for the second quarter, which is well above its 7.0% required regulatory minimum. It continues to manage its adjusted CET1 ratio in its 9%-10% operating range, giving it flexibility to fund additional loan growth or conduct more significant buybacks.

We are decreasing our fair value estimate to $18.30 per share from $18.70. The decrease is primarily due to slower balance sheet growth from tempered management guidance, along with a more hawkish interest rate environment than we had previously anticipated. We now forecast higher short-term interest rates for a few years. We don't anticipate getting to our long-run federal-funds rate assumption of 2.5% until the end of 2031. We incorporate higher deposit funding costs from increased deposit competition and higher debt costs for the next 3 to 5 years, partially offset by higher securities' and loan yields. This leads to a 50 basis points lower net interest income compound annual growth rate (8.7%) through 2030 compared to our previous assumptions. Our fair value estimate is equivalent to 1.7 times tangible book value, excluding AOCI, as of the end of June.

Our base-case scenario projects loan growth of 1.1% (excluding Veritex and Cadence) in 2026 (down from 7.9% in 2025), with commercial loans as the primary driver. We expect Cadence to drive around 25% loan growth for 2026. For the combined new Huntington, we forecast loan growth of around 5.2% and 3.5% in 2027 and 2028, respectively. We forecast 35.2% growth in net interest income in 2026, primarily driven by a much larger balance sheet. We see a solid 5.4% increase in NII in 2027 (previously 6.2%) and a smaller NII increase of 2.1% in 2028 (previously 2.0%), as the bank benefits from fixed-asset repricing and moderate balance sheet growth. We now forecast a terminal net interest margin of about 3.09%, consistent with our previous assumptions. Our NIM forecasts remain similar to our previous assumptions because higher funding costs are mostly offset by higher asset yields.

In 2026, we think Huntington should have an outlier year with about 31% adjusted fee growth from the prior year because of the incorporation of two bank acquisitions and the acquisition of TM Capital and other capital market business units from Janney Montgomery Scott, which will boost the bank's fee income growth in 2026. We see strong adjusted fee growth of 3.5%-4.5% in 2027 and 2028, largely driven by payment-related revenue and wealth management fees. We think management's goal of driving 10% or higher annual fee growth in the medium term is quite ambitious, even if the bank realizes some revenue synergies, which we exclude from our base-case forecast.

For core expense growth, we project around 33% in 2026, 5.5% in 2027, and 4.6% in 2028. This growth is driven by Huntington’s two acquisitions, expansion into new markets, and additional investment in its core fee lines, primarily in payments and wealth management. We anticipate that it will make significant investments in opportunities arising from its Veritex and Cadence acquisitions. We think management's goals around cost savings are lofty because the two recent acquisitions don't have much overlap with existing branches, meaning it should be harder to achieve cost-saving targets. Historically, Huntington reinvests most cost savings to spur faster growth rather than passing these savings to the bottom line. We think increased scale drives improvement in the bank’s efficiency, with a midcycle efficiency ratio forecast of around 60.5% (or 60.0% on an adjusted basis).

We expect 2026 net charge-offs to be about 28 basis points, similar to the 30 basis points in 2024. On a normalized basis, we forecast the bank's net charge-off ratio to be around 34 basis points, within management’s medium-term range of 25-45 basis points. Overall, we expect an adjusted 15.6% ROTCE through the cycle, well below management's 18% or higher target, compared with our estimate of the bank’s cost of equity at 8.9%.

We do not believe Huntington has an economic moat, based on our moat framework for banks. We project that Huntington will earn a midcycle return on tangible common equity in the midteens, higher than our 8.9% cost of equity estimate, but we think it lacks a cost advantage and meaningful switching costs. We would like to see the bank make progress in lowering its deposit funding costs before we consider awarding it a moat.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages coming from three primary factors: a low-cost funding base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered.

We assess Huntington’s overall funding costs as slightly worse than the US regional banks under our coverage in the current interest rate cycle. We don’t view its cost of funding as advantaged compared with peers. It has a lower proportion of non-interest-bearing deposits than its peers, which drags on the aggregate deposit costs paid by the bank. The interest Huntington pays out on its interest-bearing deposits is in line with its peers. We expect this relatively disadvantaged deposit cost position to persist. The impact of the Cadence acquisition on Huntington's deposit costs should be relatively neutral because Huntington and legacy Cadence have similar deposit costs.

We believe Huntington will not have a durable operating efficiency advantage relative to its peers going forward. Huntington was able to integrate its two largest bank acquisitions (FirstMerit and TCF) into its existing network and streamline the consolidated bank fairly quickly after those deals closed. This is demonstrated by its efficiency ratio (noninterest expenses to revenue) significantly declining in the year following each major acquisition. Excluding these large acquisitions, its historical efficiency ratio is in the middle of the pack among its peer set (large US regional banks). We think its recent acquisitions of Veritex and Cadence improved Huntington’s scale, and we forecast the bank should have a better operating efficiency compared with its past 10-year average of above 63%. However, even after the improvement, we still forecast Huntington will operate with an efficiency ratio around 59.4%, on the very high end of the typical narrow-moat peers’ efficiency ratio range of mid- to high 50s on a normalized basis. Huntington's integration of the Cadence acquisition and expansion into Texas and Carolina also puts pressure on its operational costs in the near term.

In terms of credit costs, we do think that Huntington has generally demonstrated similar underwriting capabilities compared with its peers. Huntington’s net charge-offs (losses on loans that must be recorded as uncollectible) to average loans was over twice that of narrow-moat peers from 2009 to 2012 and nearly 40% higher during 2020. Huntington had elevated charge-offs coming out of the global financial crisis, primarily due to its large exposure to the commercial real estate sector (15%-20% of total loans). It also shifted its auto lending business to focus solely on superprime customers because auto financing was the other pressured area for Huntington coming out of the global financial crisis. Underwriting in the US banking industry has improved following the global financial crisis, and we think Huntington will maintain credit costs in line with regional peers. We don’t think we’ll see structural changes in the bank’s approach to create an advantage of superior credit costs over peers.

Regulatory costs matter for both the broader banking industry and Huntington specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger postcrisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and still do. Our long-run outlook is positive, given the US' stable democracy, steady GDP growth, and reserve currency status. Huntington is not large enough to be a global systemically important bank, avoiding the most burdensome rules, but it will become a Category III bank after its trailing 12-month average assets go above $250 billion, which we estimate will happen in late 2026 or early 2027. The key change for banks with $100 billion-$700 billion in assets is including accumulated other comprehensive income in common equity Tier 1 capital, which Huntington should handle well. As of the second quarter, Huntington had a CET1 ratio (including AOCI) of 9.0%, well above its current minimum requirement of 7%.

Although we believe all banks have switching costs to an extent, we don't think Huntington exhibits any switching costs strong enough to lead to a stand-alone moat source for the firm. We don't view Huntington as having a material advantage that enables it to retain clients at a rate higher than other banks or incentivizes them to switch from other banks or financial institutions. On a normalized basis, we forecast the bank to derive fee income around a mid-20s percentage of revenue, materially below the typical above-30% range among moaty regional peers. We would like to see Huntington increase its fee income penetration in its legacy client base and the recently acquired Veritex and Cadence, such as payment, treasury management, and wealth management.

The bank should realize more balance sheet growth from its push into Texas and the Carolinas.

Huntington’s total office commercial real estate exposure is lower than that of peers.

Huntington’s initiative on focused investments in payments and wealth management services should drive solid fee growth for the bank in the long run.

Huntington faces elevated execution risks from the acquisitions of Veritex and Cadence.

Huntington may face notable pressure from increased deposit competition spurred by higher short-term interest rates.

Huntington has a large indirect auto lending portfolio, which could hurt the bank if auto-related credit costs came in higher than expected.