Q1 2024 Earnings Summary
- HBAN is experiencing strong loan growth across various segments, including auto, distribution finance, and business banking, with expectations to accelerate growth over the course of 2024 and into 2025.
- The bank's expansion into new markets such as the Carolinas and Texas, along with new specialty verticals, is delivering promising results, positioning HBAN to outperform peers in loan growth.
- HBAN has strong credit quality, with stable metrics and proactive management of exposure to riskier sectors like office commercial real estate, reducing the office portfolio by $500 million over the past four quarters.
- The proposed debit card interchange reform could have an annualized impact of approximately $90 million on fee income, which is not included in 2024 guidance, representing a potential headwind.
- Net Interest Margin (NIM) outlook has been lowered due to higher funding costs and a delay in expected rate cuts, leading to pressure on Net Interest Income (NII) guidance.
- Declining noninterest-bearing deposits, particularly in the business and commercial segments, may increase funding costs and pressure net interest margin.
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Net Interest Income Guidance
Q: Why has NII guidance changed despite similar rate cut assumptions?
A: Management explained that the NIM outlook is slightly lower due to expectations of a longer pause before Fed rate reductions, leading to slightly higher deposit funding costs. They now anticipate a few basis points of additional funding costs in 2024. Despite this, they expect accelerating loan growth to offset some pressures. They are confident in achieving their full-year NII guidance of down 2% to up 2%, aiming for the middle of the range. -
Loan Growth Outlook
Q: What is driving the loan growth acceleration?
A: Management is confident in loan growth, expecting to be at the upper end of their 3% to 5% guidance. They cite a robust commercial loan pipeline, with each month showing improvement. About 60% of growth is expected from core markets and 40% from new initiatives, including expansions in the Carolinas and Texas. Early traction in these new areas is positive, with pipelines approaching $2 billion in loans. -
Deposit Trends and Pricing
Q: How are deposit trends and pricing strategy evolving?
A: Deposit balances saw modest declines in noninterest-bearing deposits during the quarter. Management expects the noninterest-bearing mix to stabilize in the high teens, at 19.4% as of Q1. The competitive environment remains consistent, and their pricing strategy is to remain competitive but not lead the market, focusing on customer acquisition for deposit growth. -
Credit Quality and Office CRE Exposure
Q: Any concerns about credit quality, particularly in office CRE?
A: Management reports that credit metrics remain strong, in line with previous quarters. They acknowledge focus on office commercial real estate but note they have one of the smaller books and have reduced the office portfolio by about $500 million over the last 4 quarters. The largest loan is $40 million with an average of $7 million, indicating a granular portfolio. -
Fee Income Outlook
Q: What is the outlook for fee income growth?
A: They expect fee income to accelerate, with guidance for full-year growth of 5% to 7%, compared to 3% year-over-year growth in Q1. Key drivers include capital markets, payments (payments revenue up 7%), and wealth management (wealth revenue up 10% in Q1). -
Allowance for Credit Losses
Q: How are you thinking about reserving going forward?
A: Management notes that the Allowance for Credit Losses (ACL) ratio is stable and among the top of peers. They consider multiple factors like economic scenarios and loan growth, making it hard to predict ACL movements. They aim to be conservative with reserves, and if performance continues, there may be reserve recapture in the future. -
Debit Card Interchange Reform Impact
Q: Any updates on potential debit interchange fee reform?
A: There is no substantive update on interchange reform. The proposed changes could have an annualized impact of around $90 million, but the outcome is uncertain. They expect the potential impact to be mid to late 2025 and not included in 2024 guidance.