Thinking ahead to the day when credit quality sours

Huntington Bancshares executives are waiting for the other shoe to drop.

For the past several quarters, including the three months that ended Sept. 30, the Columbus, Ohio, company’s leadership has cautioned that asset quality metrics cannot remain at their current, historically strong levels.

They remain stubbornly pristine, nevertheless.

The $102 billion-asset Huntington said Thursday that third-quarter net chargeoffs totaled $43 million or 0.25% of average loans and leases. That figure is down slightly from the same period in 2016 — and well below the company’s guidance of 35 to 55 basis points.

Nonaccrual loans of $338 million were down 20% year over year.

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“Frankly, we’ve been experiencing years, not just quarters, of great asset quality,” Chairman and CEO Steve Steinour said Thursday in an interview. “The industry generally has had some good years, but Huntington has had some great ones.”

At the same time, Steinour’s colleagues used a conference call with analysts to drive home the point that the good times cannot last and some kind of correction is just over the horizon.

“We’ve been operating below our long-term [expectations] on chargeoffs for some time. I do think you’ll see that drift upward eventually,” Daniel J. Neumeyer said on the call. “The increase will be modest and gradual. I don’t think it’s reasonable to think we’re going to sustain these levels over the long term.”

All that said, company officials predicted that any return to normal credit quality levels would be gradual, said their business plan assumes chargeoff rates of 35 to 55 basis points, and assured they are properly capitalized to handle a market softening.

Moreover, their discussion of the bank's loan portfolio gave some sense of the bounds of their risk-taking.

Huntington reported total loans of $68.3 billion on Sept. 30, an increase of 12% from the same time in 2016. But commercial loan growth has been stalled throughout much of 2017. Commercial-and-industrial loans of $27.6 billion are virtually unchanged since the beginning of the year.

With deals harder to come by, competition has grown increasingly fierce, and Huntington has chosen to pass up some credits rather than loosen its underwriting standards.

“We’re willing to do other things with the capital rather than just follow the crowd,” Steinour said.

Huntington remains an aggressive consumer lender. It is one of the industry’s largest indirect automobile lenders, and its portfolio continued to experience solid growth. Production for the quarter was $1.6 billion, and the auto portfolio totaled $11.9 billion on Sept. 30, up 10.2% from the same date last year.

Commercial loan growth could have been even better if uncertainty surrounding tax reform and other economic policies being debated in Congress could be resolved, according to Steinour, who said companies are holding off on major investments until Washington charts its course.

“This has been an unusual year,” Steinour said “Certainly, I haven’t seen a year like this in my career. Gross domestic profit is up, but loan activity has been flat or down for an extended period.”

While Steinour tabbed policy uncertainty as one of the headwinds that have limited Huntington’s commercial loan growth throughout 2017, he said 2018 could start with a bang if a tax-reform package is enacted.

“We see 2018 as another good year and maybe a very good one if we get some of the tax-policy issues addressed,” he said.

In the meantime, third-quarter profits rose 116% to $275 million. Revenue topped $1.1 billion for the first time in corporate history, up 17% from a year earlier. Huntington closed its acquisition of the $26.2 billion-asset FirstMerit Corp. midway through August 2016, so third-quarter results that year did not fully reflect the combination’s impact.

Excluding $31 million of one-time charges related to the acquisition of FirstMerit, Huntington’s earnings per share of 25 cents equaled analysts’ estimates. The net interest margin widened 11 basis points year over year to 3.29%, while total deposits of $77.5 billion rose 17%.

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