October 3, 2017 / 8:55 PM / a year ago

Fitch Affirms Huntington Bancshares' LT IDR at 'A-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, October 03 (Fitch) Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of Huntington Bancshares, Inc. (HBAN) with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. The rating action follows a periodic review of the large regional banking group, which includes Huntington Bancshares Inc. (HBAN), BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), and Wells Fargo & Company (WFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT HBAN's rating affirmation is supported by the company's solid financial profile, including good earnings trajectory, improved funding profile and stable asset quality performance. Further, HBAN seems on pace to successfully execute the integration of FirstMerit (FMER) while also demonstrating continued progress in achieving its financial targets. Fitch believes the company's earnings are sustainable, particularly given good loan growth and stable credit performance, which support the current ratings level. Additionally, the FMER transaction presents good cost save opportunities, estimated at 40%, which, in Fitch's view, is a reasonable assumption given market overlap in key markets such as Ohio as well as Michigan. The combined entity is expected to deliver improvements to ROAA of 15 basis points (bps) and ROTCE of 300bps compared to HBAN's stand-alone measures by 2018. HBAN expects to achieve $255 million in annualized cost savings. Fitch believes these forecasted measures are achievable based on cost saves and the expected credit performance of FMER's portfolio. Further, the company is targeting $100 million of total revenue enhancements in 2018 mainly through cross-sell opportunities to FMER's customer base and growth in consumer assets such as residential mortgages and RV & Boat lending while also expanding small business lending. HBAN's credit performance, like many of its peers, remains sound and supports current ratings. Over the last few years, HBAN loan growth has been above the peer average. Much of the growth has come from auto lending and acquisitions that have increased C&I loans. More recently, excluding the FMER acquisition, loan growth has slowed and is in-line with the peer group. To-date, credit performance has remained stable and NCOs are well below normalized ranges of 35bps to 55bps. Fitch remains cautious regarding C&I lending across the industry which remains very competitive. Incorporated in the Stable Outlook is Fitch's view that HBAN will continue to deliver above peer credit performance within its auto securitization programs as well as its on balance sheet portfolio despite expected challenges in the auto sector related to used car values. The company has a long, established history of indirect auto lending with strong asset quality measures through various credit downturns. Of note, the company has grown its auto portfolio in new markets over the last few years given opportunities as others have pulled back. Nonetheless, the company has continued to originate the same borrower base with minimal changes to its underwriting practices. Further, HBAN has prudent risk monitoring practices in place, particularly for newer markets. HBAN's funding profile is considered solid and in-line with peers. Over the last several years, HBAN has been focused on growing its retail deposit base with much success reflected by the increase in non-interest bearing deposits which accounts for about 30% of total deposit mix. Nonetheless, similar to peers, Fitch expects HBAN to experience a manageable level of deposit run-off in a rising rate environment. Although HBAN's capital position has been trending lower given its acquisitions, loan growth and capital return to shareholders, Fitch considers the bank's capital levels to be adequate given HBAN's improvements in its risk profile. Additionally, HBAN's solid earnings growth has led to a good rate of internal capital generation, which should help maintain sound capital levels. Given the FMER acquisition, HBAN's tangible common equity position has declined compared to a year ago but is still in-line with current ratings and expectations. For 2Q17, HBAN's CET1 ratio stood at 9.88%, its TCE/TA totaled 7.28% and its FCC/RWA was 8.9%. 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 level below its VR for loss severity. HBAN's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while HBAN's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of Huntington National Bank are rated one notch higher than HBAN'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. HOLDING COMPANY HBAN's IDR and VR are equalized with those of its operating companies and bank, 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 failure and default probabilities. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch believes HBAN's ratings do not have ratings upside over the near to intermediate term 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 the FMER transaction. Moreover, HBAN's ratings could be pressured if it is not able to realize/generate the internal rate of return, estimated profitability improvements, and targeted cost saves. 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. Given its relatively larger auto lending portfolio and Fitch's concerns with auto lending in general, HBAN's ratings would be sensitive to the performance of this portfolio. 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 Since HBAN's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for HBAN and its operating companies' subordinated debt and preferred stock are sensitive to any change to HBAN's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to HBAN's long- and short-term IDR. 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. 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 at '5'; --Support Floor at 'NF'. Huntington Capital I, II --Preferred stock at 'BB+'. Sky Financial Capital Trust III & IV --Preferred stock at 'BB+'. Contact: Primary Analyst Doriana Gamboa Senior 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 Joo-Yung Lee Chairperson Managing Director +1-212-908-0556 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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