Pressure on Huntington’s Earnings

On July 23, 2009 before the opening bell, Huntington Bancshares Inc (HBAN - Analyst Report) reported second quarter 2009 results. Core earnings were ($0.44) per share abysmally missing our as well as Street’s expectations. We expected a loss of $0.03 per share. Last year earning was $0.28 per share. Net loss (GAAP) was $0.40 per share, compared to $0.25 last year. 

Net interest margin expanded 13 basis points sequentially but shrank 19 basis points year over year to 3.10%. 

Credit metrics continued to experience substantial erosion again in this quarter. Net charge-offs were 3.43% of average total loans and leases, up from 3.34% last quarter and 0.64% last year. NPA ratio was 5.18%, up from 4.46% last quarter and 1.52% last year. Provision for loans and leases were $413.7 million, down $121.9 million sequentially but up $292.9 million year-over-year. 

Book value per share declined to $6.23 per share from $7.8 per share last year and $15.88 per share last year. 

Results were also shortened by a special assessment fee from the Federal Deposit Insurance Corp. The FDIC charged banks a special fee during the second quarter to help replenish its insurance fund. Huntington Bancshares recorded a $23.6 million pretax charge related to the fee. 

During the quarter, HBAN raised $704.9 million of capital, increasing tangible equity ratio and Tier 1 capital ratio by 103 and 116 basis points respectively on linked quarter basis to 5.68% and 6.80% respectively. Besides shielding HBAN from mounting losses the capital raise would position HBAN to repay $1.4 billion of TARP funds it received last year. 

We expect earnings to remain depressed due to the continued pressure on interest margin, restricted loan growth and the deterioration of credit quality. Charge-offs and provisioning and loan loss reserves are expected to remain at elevated levels considering the weak economy along its geographic footprints. Though the capital bolstering initiatives add to its capital base, they also lead to share dilution. 

Pending further positive developments we continue to rate the shares as Sell.