|Huntington CEO Stephen Steinour|
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 MarginThe 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.
The year-over-year net interest income growth reflected a 4% increase in in average loans and leases, with commercial and industrial loans growing 14% to $17 billion in the first quarter. Meanwhile, average interest-bearing liabilities were down slightly year-over-year. Average noninterest bearing checking account grew 8% year-over year to $12.2 billion, although they were down 7% from the fourth quarter, because of the bank's "effort to reduce collateralized deposits," and because of "a recent uptick among our business customers of drawing down cash balances to support working capital needs," according to comments by CEO Stephen Steinour in the company's earnings press release. Speaking at a conference on Thursday, Steinour said Huntington's "net interest margin is down 5 basis points over the last 3 years, while the peer average is down over 20 basis points." "Our growth in non-interest bearing deposits has helped us re-mix the balance sheet very significantly, providing one of the key factors that allowed us to maintain, generally maintain, our net interest margin, despite pressures from the yield curve," he said. Looking ahead, Steinour said "I think what we're likely to see is that the asset yield pressures will, frankly, abate," meaning that the market will drive loan rates higher, as securities yields continue to rise. He also expects Huntington to continue to benefit from its focus on building multiple relationships with each customer, to drive a continued increase in noninterest-bearing checking accounts.
A Balanced Rate play"For investors looking to add 'rate sensitive' names, we would point to HBAN, a less recognized rate sensitive bank which in our view trades at a reasonable absolute P/E (10.5x) and a discounted relative P/E (0.75x)
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-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn