Buy Huntington Bancshares for Solid Rate Play: Merrill Lynch

Updated from 11:54 a.m ET with afternoon market action and Huntington's interest rate shock analysis showing benefits of rising rates.

NEW YORK ( TheStreet) -- Huntington Bancshares ( HBAN) is an excellent play for investors looking for a bank stock that will benefit when short-term rise, according to Bank of America Merrill Lynch analyst Erika Penala.

In a report on Thursday, Penala wrote that in light of the recent spike in market rates for 10-year U.S Treasury bonds, her research team updated its proprietary rate scorecard for banks. The analysts found that the regional banking names covered by their firm that would see the greatest earnings benefit from an increase in short-term rates included Zions Bancorporation ( ZION), Comerica ( CMA), KeyCorp ( KEY), Huntington and Fifth Third Bancorp ( FITB).

Penala has neutral ratings on all the above names, except for Huntington Bancshares of Columbus, Ohio, which she rates a "buy," because the stock's valuation is "still reasonable," amid a strong rally for bank stocks. Her price target for the shares is of $8.00.
Huntington CEO Stephen Steinour

Huntington's shares closed at $7.71 Wednesday, returning 21% this year, following a 20% during 2012. The shares trade for 1.3 times their reported March 31 tangible book value of $5.91, and for 11.0 times the consensus 2014 earnings estimate of 70 cents a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 67 cents.

Based on a quarterly payout of five cents, the shares have a dividend yield of 2.59%. Huntington's board of directors in April approved a $227 million share buyback plan.

Huntington's shares were up 3% in afternoon trading, to $7.91.

While including Huntington as the only buy-rated name among covered regional banks best-positioned for rising short-term rates Penala also said that Huntington was among two regional banks "best positioned to defend" their net interest margins, also including Capital Bank Financial ( CBF) of Coral Gables, Fla., which she also rates a "buy," with a price target of $23.00.

Defending the Net Interest Margin

The Federal Reserve has kept the short-term federal funds rate in a range of zero to 0.25% since later 2008. Since September, the central bank has been making monthly purchases of $85 billion in long-term securities in an effort to hold long-term rates down. So most banks have already seen the bulk of the benefits from lower funding costs, while their assets have continued to reprice lower. This has led to net interest margin pressure for most banks. The margin is the spread between the average yield on loans and investments and the average cost for deposits and borrowings.

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