Q3 2024 Earnings Summary
- Strong Revenue Growth Driven by Capital Markets and Fee Income: Huntington Bancshares reported higher-than-expected revenues, primarily due to exceptional performance in capital markets, achieving a 12% year-over-year growth in fees . The company expects this positive momentum to continue, anticipating sequential growth in capital markets and sustained fee revenue growth into the next quarter and beyond .
- Dynamic Management of Asset Sensitivity and Positive NIM Outlook: The bank is actively managing its balance sheet to reduce asset sensitivity, implementing strategies such as forward starting receivers. They expect to continue NIM expansion throughout 2025, leading to record net interest income . Management indicated that fewer rate cuts would result in even better NIM performance and net interest income dollars .
- Enhancement of Fee Income through Merchant Acquiring Business: By bringing merchant acquiring capabilities in-house, Huntington projects to add approximately 1% to overall fee revenue growth . The merchant acquiring revenue is expected to double from $25 million to $50 million annually next year, enhancing their payments revenue stream .
- Dependence on Interest Rate Cuts: Huntington's net interest margin (NIM) and net interest income (NII) forecasts are heavily reliant on anticipated Federal Reserve rate cuts. If these cuts do not occur as expected, the bank's NIM and NII growth may be negatively impacted. As CFO Zachary Wasserman stated, "our underlying forecast assumes a couple of rate cuts this quarter and then 5 into next year" .
- Reducing Asset Sensitivity Amid Interest Rate Uncertainty: The bank is significantly reducing its asset sensitivity through hedging strategies, including $1 billion in forward starting receivers. This reduction may limit the bank's ability to benefit if interest rates remain stable or rise, posing a risk if the interest rate environment does not align with their expectations .
- Potential Short-Term Pressure on Net Interest Margin: The bank expects NIM to be "a few basis points lower into the fourth quarter," influenced by timing impacts before accelerating betas offset variable loan impacts. This suggests potential short-term pressures on NIM, which could affect earnings if not managed effectively .
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NII and NIM Growth Outlook
Q: Will NII and NIM accelerate through 2025?
A: Management expects sustained NIM expansion from Q4 2024 into 2025, driven by accelerating deposit betas and reduced hedge drag, leading to record NII dollars in 2025. They anticipate NIM above 3% in the second half of next year, supported by robust loan growth of around 6% annually. -
Loan Growth Momentum
Q: Can you sustain strong loan growth into next year?
A: They are experiencing outstanding loan growth, currently at a 6% annualized pace, with expectations to maintain this momentum into 2025. -
Deposit Growth Strategy
Q: How are you managing deposit growth and costs?
A: Deposit growth has been significantly faster than the industry average, primarily from strong consumer deposits and growing commercial deposits. They plan to decelerate deposit growth, keeping balances relatively flat in Q4 QoQ, to leverage their position and drive funding costs lower. -
Sensitivity to Rate Cuts
Q: How do potential rate cuts affect your NII outlook?
A: Fewer rate cuts would result in better NIM performance and higher NII dollars in the short term. While their forecast assumes a couple of rate cuts this quarter and five into next year, less reduction in rates would be universally positive. -
Expense Management and Operating Leverage
Q: Should we expect expense growth to slow next year?
A: They aim to drive positive operating leverage in 2025, focusing on efficiency improvements while continuing to invest in growth. They do not intend to be in "harvest mode" but expect solid improvements in the efficiency ratio. -
Capital Growth and CRT Transactions
Q: Will you continue using CRTs to grow capital?
A: Capital growth is primarily driven by core organic earnings and strong return on capital. Credit Risk Transfer (CRT) transactions are viewed as tactical and opportunistic; they may be used in the future but are not the main strategy for capital growth. -
Credit Quality in Auto Loans
Q: Are you seeing any deterioration in auto loan credit?
A: They are not seeing broad deterioration; late-stage delinquencies and charge-offs remain within historical levels. The auto loan portfolio focuses on prime and super-prime credit, with disciplined underwriting practices. -
Revenue Outperformance
Q: What drove revenues above expectations this quarter?
A: Capital markets performed better than anticipated, driven by strong execution and sustained performance in key areas. They expect another strong quarter with sequential growth in capital markets in Q4. -
Hedging Program Adjustments
Q: Have you made changes to your hedging strategy?
A: They continue to dynamically manage asset sensitivity, significantly reducing it through actions like adding $1 billion in forward starting receivers, aiming to protect capital and stabilize NIM.