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Fitch Affirms Huntington Bancshares' at 'A-' Following FirstMerit Acquisition Announcement
January 26, 2016 / 8:03 PM / 2 years ago

Fitch Affirms Huntington Bancshares' at 'A-' Following FirstMerit Acquisition Announcement

(The following statement was released by the rating agency) NEW YORK, January 26 (Fitch) Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of Huntington Bancshares, Inc. (HBAN) with a Stable Outlook following its announcement that it will acquire FirstMerit Corporation (FMER). A full list of rating actions is detailed at the end of this rating action commentary. The transaction is valued at $3.4 billion made up roughly 80% stock and 20% cash. The deal represents a price-to-tangible book value of 1.6x with a core deposit premium of 6.8% for FMER. The deal is expected to be accretive to HBAN's earnings in 2018 with an estimated increase return to tangible common equity to 300 basis points (bps), improvement to efficiency ratio of 400 bps and IRR of 20%. The transaction is expected to close in the third quarter of 2016 (3Q16), subject to regulatory approval. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch's affirmation and Stable Outlook reflects our view that the FMER transaction represents low credit risk, manageable integration, and reasonable cost save estimates given the significant amount of overlap between the two entities. Further, execution risks are viewed as modest given that FMER is a solid institution with good earnings and asset quality performance. Nonetheless, HBAN's capital position will decline, however, Fitch views this decline in the context of the transaction coupled with HBAN's ability to return to stronger capital levels. HBAN's estimated pro forma CET1 is expected to go down to 8.7% at deal close from 9.7% at 4Q15. The company has also indicated that it expects CET1 to build back to around 9.00%. In Fitch's opinion, this transaction presents good cost save opportunities (company estimates of 40%) which in our view is a reasonable assumption given market overlap in key markets such as Ohio and Michigan. The combined entity is expected to deliver improvements to ROAA of 15bps and ROTCE of 300bps% compared to HBAN's stand-alone measures by 2018. Fitch believes these forecasted measures are achievable based on cost saves and the expected credit performance of FMER's portfolio. The price of the transaction is also in-line with recently announced acquisitions for banks of similar size. In Fitch's view, the combined entity risk profile is in line with HBAN's current ratings and reflects a very similar blend. Further post-closing, the loan portfolio composition mirrors HBAN's current mix reflecting 41% in Commercial & Industrial, 13% Commercial Real Estate and 20% Auto/Marine RV. Additionally, HBAN is taking a 1.9% credit mark, which appears appropriate given the credit performance and risk profile of FMER. The deposit profile of FMER is also similar to HBAN and the combined entity should easily comply with modified LCR given core funding profile and good liquidity on the balance sheet. Post-closing, HBAN would have leading market share in Ohio and new entrance into the Chicago MSA and Wisconsin. Fitch last affirmed HBAN's IDRs and Viability Rating (VR) on Oct. 5, 2015. SUPPORT RATING AND SUPPORT RATING FLOOR HBAN has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, HBAN is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES HBAN's subordinated debt is notched one below its VR of 'A-'. The company's trust preferred securities are notched four below the VR reflecting two notches down for loss severity and two notches down for non-performance. HBAN's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. Subordinated debt and other hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR. HOLDING COMPANY HBAN's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities. SUBSIDIARY AND AFFILIATED COMPANY The IDRs and VRs of HBAN's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Huntington National Bank are equalized across the group. LONG- AND SHORT-TERM DEPOSIT RATINGS HBAN's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch believes HBAN's ratings do not have ratings upside given that performance is in-line with similarly rated peers coupled with its forecasted capital position. HBAN's ratings are sensitive to its ability to achieve many of the key targets in undertaking this transaction. Specifically, its ratings would be sensitive to its ability to build its CET1 ratio up to 9%. Moreover, HBAN's ratings could be pressured if it is not able to realize/generate the internal rate of return, estimated profitability improvements, and cost saves incorporated in the deal. Further, should unexpected operational and integration risks arise that are material to financial performance HBAN's rating could likely be reviewed for negative rating action. Additionally, ratings pressure could ensue should management take an aggressive approach to capital management such as future acquisitions of size or a total pay-out ratio that pushes capital below peers. SUPPORT RATING AND SUPPORT RATING FLOOR HBAN's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and other hybrid capital issued by HBAN and its subsidiaries are primarily sensitive to any change in HBAN's VR. HOLDING COMPANY Should HBAN's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for HBAN given the strength of the holding company liquidity profile. SUBSIDIARY AND AFFILIATED COMPANIES As the IDRs and VRs of the subsidiaries are equalized with those of HBAN to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in HBAN's IDRs. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by HBAN and its subsidiaries are primarily sensitive to any change in HBAN's long- and short-term IDRs. Fitch has affirmed the following ratings: Huntington Bancshares, Incorporated --Long-term IDR at 'A-'; Outlook Stable; --Short-term IDR at 'F1'; --Viability rating at 'a-'; --Senior unsecured at 'A-'; --Subordinated debt at 'BBB+'; --Preferred stock at 'BB'. --Support at '5'; --Support Floor at 'NF'. Huntington National Bank --Long-term deposits at 'A'; --Long-term IDR at 'A-'; Outlook Stable; --Viability rating at 'a-'; --Senior unsecured at 'A-'; --Subordinated debt at 'BBB+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1'; --Support at5'; --Support Floor at 'NF'. Huntington Capital I, II --Preferred stock at 'BB+'. Sky Financial Capital Trust I-IV --Preferred stock at 'BB+'. Contact: Primary Analyst Doriana Gamboa Director +1-212-908-0865 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available at ''. Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=998418 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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