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We have downgraded our recommendation on Huntington Bancshares Inc. ((HBAN - Analyst Report)) to Neutral from Outperform following a detailed analysis of its second quarter 2011 earnings results in light of the current economic environment.

Huntington Bancshares reported second quarter 2011 earnings of 16 per share, beating the Zacks Consensus Estimate by a penny. A slightly better-than-expected result reflected a significant improvement in credit quality with a drop in loan loss provisions.

Huntington also declared an increase in its dividend to 4 cents per share from 1 cent paid in the prior quarter. While the company posted an increase in non-interest income, its net-interest income remained subdued.

However, Huntington remains focused on capitalizing on growth opportunities. By making active efforts to reduce its problem assets, the company has lowered the level of its criticized commercial loans. Strategic initiatives and further improvement in credit quality are likely to support its earnings growth. Its capital position remains solid. The dividend hike also gives a fillip to investors’ confidence.

Yet, going forward, only a modest expansion in revenue is projected in the presence of several top-line headwinds. The lack of opportunities for a meaningful economic improvement and a weak borrower and consumer confidence level are expected to limit top-line growth potentials. The low rate environment, coupled with limited loan growth prospects in a tepid economic recovery, somewhat suppresses any substantial interest margin improvement in the near term.

Also, regulatory concerns continue to persist and its fee income is expected to remain pressured. The provision regarding debit card interchange fees will become effective on October 1, 2011. Based on the final rule, the company expects its fourth quarter 2011 electronic banking income to decline from the second quarter 2011 level by approximately 50%.

Therefore, economic headwinds, coupled with regulatory issues, are expected to keep the stock range bound. Hence, the risk and reward profile seems somewhat balanced for Huntington, and we assign a Neutral recommendation on the company.

Additionally, Huntington shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. One of the closest peers of Huntington, Northern Trust Corporation ((NTRS - Analyst Report)), also retains a Zacks #3 Rank.

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