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Low Rates, Provisions to Hurt Huntington (HBAN) Q2 Earnings
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Huntington Bancshares (HBAN - Free Report) is slated to report second-quarter 2020 results on Jul 23, before the opening bell. The company’s results are projected to reflect a year-over-year decline in earnings and revenues.
In the last reported quarter, its earnings missed the Zacks Consensus Estimate. The results were adversely impacted by lower net interest income and increase in provisions, along with pressure on margin. However, decline in operating expenses and higher fee income were tailwinds.
Huntington’s earnings estimate revisions have been depicting analysts’ pessimistic stance. The Zacks Consensus Estimate for earnings of 6 cents has moved 40% downward over the past 30 days. Also, this indicates a 81.8% slump from the year-ago reported figure.
Also, the consensus estimate for sales of $1.15 billion suggests a decline of 3.3% from the year-ago quarter. Notably, management expects total revenues to decline 4-5% sequentially as the larger average balance sheet is more than offset by moderate pressure on the organic net interest margin (NIM) and COVID-19-related declines in fee income.
Before we take a look at what our quantitative model predicts, let’s check the factors that might impact the second-quarter results.
Key Factors at Play
Soft Net Interest Income (NII) Growth: During the quarter, the overall lending scenario was muted. Though there was sustained growth in commercial and industrial, and commercial real estate loans (together constituting almost 50% of Huntington’s loan portfolio), consumer loan demand was significantly weak.
Management expects average commercial loan growth of 4-5% on a sequential basis, taking into account the full-quarter impact of $3.2 billion commercial line draws but excluding $6-billion paycheck protection program lending. Average consumer loans are likely to have been flat or declined slightly from the prior quarter as persistent growth in residential mortgage is partially offset by home equity and indirect auto runoff.
Further, near-zero interest rates are expected to have hurt Huntington’s NII in the second quarter. Also, this is likely to have resulted in a contraction in NIM.
Thus, low rates and a soft lending scenario are likely to have curtailed the growth in NII to some extent. However, the Zacks Consensus Estimate for average interest earning assets of $107.8 billion for the quarter indicates a 5.9% sequential improvement, while the same for NII (tax equivalent basis) indicates a marginal rise to $798 million.
Non-Interest Revenues to Fall: Historically low mortgage rates led to a significant rise in refinancing activities during the second quarter, while growth in new originations was weak. The consensus estimate of $64 million for mortgage banking revenues suggests a rise of 10.3% sequentially.
However, lower consumer spending is likely to have hurt the company’s card fees. The Zacks Consensus Estimate for cards and payment processing revenues of $49.6 million indicates a 14.5% decline from the prior quarter.
Further, the consensus estimate for insurance income is pegged at $22.7 million, indicating 1.4% fall on a sequential basis.
Moreover, while a substantial rise in client activity and higher market volatility supported trading revenues during the to-be-reported quarter, subdued investment banking performance was an undermining factor. Thus, the company’s capital markets fees are likely to have been muted. The Zacks Consensus Estimate for the same suggests a 1% decline from the prior quarter to $32.7 million.
Overall, total non-interest income is likely to have declined during the quarter. The consensus estimate of $344 million for the same implies fall of 4.7% sequentially.
Management anticipates customer activity-based fee income components like deposit service charges and card and payment processing to be under pressure during the second quarter. Subsequently, fee income is expected to be down about 10% from the prior quarter.
Expenses to Rise: Management expects non-interest expenses to increase 5-6% on a sequential basis, mainly due to the CECL increase in compensation-related expense related to the annual ramp of long-term incentives and annual merit increases, partially offset by expense-reduction actions.
Worsening Asset Quality: Huntington is likely to have recorded an increase in provision for credit losses as it built reserves to combat coronavirus-induced economic slowdown.
The Zacks Consensus Estimate for total non-performing assets and non-performing loans of $586 million and $558 million, respectively, indicates no change from the prior quarter.
Further, the company expects net charge-offs to be 35-55 basis points. This should take into account the ongoing pressure in the oil and gas portfolio, as well as broader economic considerations.
What Our Quantitative Model Reveals
According to our quantitative model, chances of Huntington beating the Zacks Consensus Estimate are high this time around. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Huntington is +11.60%.
Zacks Rank: The company currently carries a Zacks Rank #3.
Huntington Bancshares Incorporated Price and EPS Surprise
Here are a few other bank stocks that you may also want to consider, as our model shows that these too have the right combination of elements to post an earnings beat in their upcoming releases.
The Earnings ESP for Associated Banc-Corp (ASB - Free Report) is +7.31% and the company presently carries a Zacks Rank #3. It is scheduled to report quarterly numbers on Jul 23.
East West Bancorp, Inc. (EWBC - Free Report) is scheduled to report quarterly earnings on Jul 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +3.47%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Image: Bigstock
Low Rates, Provisions to Hurt Huntington (HBAN) Q2 Earnings
Huntington Bancshares (HBAN - Free Report) is slated to report second-quarter 2020 results on Jul 23, before the opening bell. The company’s results are projected to reflect a year-over-year decline in earnings and revenues.
In the last reported quarter, its earnings missed the Zacks Consensus Estimate. The results were adversely impacted by lower net interest income and increase in provisions, along with pressure on margin. However, decline in operating expenses and higher fee income were tailwinds.
Huntington’s earnings estimate revisions have been depicting analysts’ pessimistic stance. The Zacks Consensus Estimate for earnings of 6 cents has moved 40% downward over the past 30 days. Also, this indicates a 81.8% slump from the year-ago reported figure.
Also, the consensus estimate for sales of $1.15 billion suggests a decline of 3.3% from the year-ago quarter. Notably, management expects total revenues to decline 4-5% sequentially as the larger average balance sheet is more than offset by moderate pressure on the organic net interest margin (NIM) and COVID-19-related declines in fee income.
Before we take a look at what our quantitative model predicts, let’s check the factors that might impact the second-quarter results.
Key Factors at Play
Soft Net Interest Income (NII) Growth: During the quarter, the overall lending scenario was muted. Though there was sustained growth in commercial and industrial, and commercial real estate loans (together constituting almost 50% of Huntington’s loan portfolio), consumer loan demand was significantly weak.
Management expects average commercial loan growth of 4-5% on a sequential basis, taking into account the full-quarter impact of $3.2 billion commercial line draws but excluding $6-billion paycheck protection program lending. Average consumer loans are likely to have been flat or declined slightly from the prior quarter as persistent growth in residential mortgage is partially offset by home equity and indirect auto runoff.
Further, near-zero interest rates are expected to have hurt Huntington’s NII in the second quarter. Also, this is likely to have resulted in a contraction in NIM.
Thus, low rates and a soft lending scenario are likely to have curtailed the growth in NII to some extent. However, the Zacks Consensus Estimate for average interest earning assets of $107.8 billion for the quarter indicates a 5.9% sequential improvement, while the same for NII (tax equivalent basis) indicates a marginal rise to $798 million.
Non-Interest Revenues to Fall: Historically low mortgage rates led to a significant rise in refinancing activities during the second quarter, while growth in new originations was weak. The consensus estimate of $64 million for mortgage banking revenues suggests a rise of 10.3% sequentially.
However, lower consumer spending is likely to have hurt the company’s card fees. The Zacks Consensus Estimate for cards and payment processing revenues of $49.6 million indicates a 14.5% decline from the prior quarter.
Further, the consensus estimate for insurance income is pegged at $22.7 million, indicating 1.4% fall on a sequential basis.
Moreover, while a substantial rise in client activity and higher market volatility supported trading revenues during the to-be-reported quarter, subdued investment banking performance was an undermining factor. Thus, the company’s capital markets fees are likely to have been muted. The Zacks Consensus Estimate for the same suggests a 1% decline from the prior quarter to $32.7 million.
Overall, total non-interest income is likely to have declined during the quarter. The consensus estimate of $344 million for the same implies fall of 4.7% sequentially.
Management anticipates customer activity-based fee income components like deposit service charges and card and payment processing to be under pressure during the second quarter. Subsequently, fee income is expected to be down about 10% from the prior quarter.
Expenses to Rise: Management expects non-interest expenses to increase 5-6% on a sequential basis, mainly due to the CECL increase in compensation-related expense related to the annual ramp of long-term incentives and annual merit increases, partially offset by expense-reduction actions.
Worsening Asset Quality: Huntington is likely to have recorded an increase in provision for credit losses as it built reserves to combat coronavirus-induced economic slowdown.
The Zacks Consensus Estimate for total non-performing assets and non-performing loans of $586 million and $558 million, respectively, indicates no change from the prior quarter.
Further, the company expects net charge-offs to be 35-55 basis points. This should take into account the ongoing pressure in the oil and gas portfolio, as well as broader economic considerations.
What Our Quantitative Model Reveals
According to our quantitative model, chances of Huntington beating the Zacks Consensus Estimate are high this time around. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Huntington is +11.60%.
Zacks Rank: The company currently carries a Zacks Rank #3.
Huntington Bancshares Incorporated Price and EPS Surprise
Huntington Bancshares Incorporated price-eps-surprise | Huntington Bancshares Incorporated Quote
Other Stocks That Warrant a Look
Here are a few other bank stocks that you may also want to consider, as our model shows that these too have the right combination of elements to post an earnings beat in their upcoming releases.
Bank OZK (OZK - Free Report) is slated to release quarterly results on Jul 23. The company has an Earnings ESP of +52.86% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Earnings ESP for Associated Banc-Corp (ASB - Free Report) is +7.31% and the company presently carries a Zacks Rank #3. It is scheduled to report quarterly numbers on Jul 23.
East West Bancorp, Inc. (EWBC - Free Report) is scheduled to report quarterly earnings on Jul 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +3.47%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Click here for the 6 trades >>