Huntington Bancshares Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 13 speakers on the call.

Operator

And welcome to the Huntington Bancshares 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Tim Sadabras, Director of Investor Relations, thank you.

Operator

You may begin.

Speaker 1

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington. As a reminder, this call is being recorded and a replay will be available starting about 1 hour from the close of the call. Our presenters today are Steve Steinauer, Chairman, President and CEO and Zach Wasserman, Chief Financial Officer.

Speaker 1

Rich Poley, Chief Credit Officer will join us for the Q and A. Earnings documents, which include our forward looking statements disclaimer and non GAAP information are available on the Investor Relations section of our website. With that, let me now turn it over

Speaker 2

to Steve. Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our Q1 results, which Zach will detail later.

Speaker 2

Huntington is very well positioned. We operate a diversified franchise with disciplined risk management. Our approach to both our colleagues and customers is grounded in our purpose to make people's lives better, help businesses thrive and strengthen the communities we serve. And during times like these, Huntington's purpose is evident in how we look out for each other and serve as a source of strength For our customers and communities, now on to Slide 4. These are the key messages I want to highlight to you.

Speaker 2

First, we have one of the strongest deposit franchises of any regional bank. We have a diversified base of primary bank customer relationships, which has been built over many years supported by our fair play philosophy. We also have the leading percentage of insured deposits as of year end. 2nd, we maintain a robust liquidity position consistent with our long standing approach to conservative Risk Management Practices. 3rd, our capital base is solid and building.

Speaker 2

Common Equity Tier 1 has increased for 3 quarters in a row and we intend to continue to build to the high end of our range. 4th, our credit reserves are top tier. Credit quality continues to perform exceptionally well and remains a hallmark of our disciplined credit management. 5th, we are dynamically managing through the current environment, bolstering capital and liquidity. We're also incrementally optimizing the balance sheet And loan growth, while continuing to proactively manage the expense base.

Speaker 2

Finally, we are well positioned to operate through uncertainty with a focus on our long term strategy and our commitment to top quartile returns. I believe Huntington is built to thrive during times like this and ultimately to benefit and to capture opportunities as they arise. Moments of market disruption present opportunities To take market share, to win new customers and to hire great talent, we are confident in our strategy and strong position. Moving on to Slide 5. We enter this period of disruption in the best position the company has been since I've joined Over a dozen years ago, the reputation our colleagues have created of best in class customer service results in customer confidence and trust in us.

Speaker 2

The 2023 J. D. Power Award for customer satisfaction reflects our colleagues' efforts. Grounded in our fair play philosophy, We continue to acquire and deepen primary bank relationships, resulting in our granular and diversified deposit base. For many years, we focused on gathering deposits that are sticky operating accounts and proactively placed larger deposits off balance sheet.

Speaker 2

We continue to invest across the franchise to drive deposit growth. We are also incrementally optimizing loan growth To generate the highest returns and ensure the capital we deploy is put to the highest and best use. And we remain focused on delivering the revenue synergies we Previously shared, accelerating the growth of our fee businesses and deepening our customer relationships. In regards to capital, CET1 increased 19 basis points from the prior quarter to 9.55 percent And we plan to build capital to the high end of our range over the course of 2023. Our credit reserves are top tier in the peer group At 1.9%.

Speaker 2

We will continue to be proactive in our expense management. In the Q1, we completed a number of actions To support our ongoing efficiency programs such as the 31 Branch Consolidations, the Voluntary Retirement Program And our organizational realignment with reductions in personnel. And in addition to Operation Accelerate, We have a roadmap to deliver continued efficiencies going forward. Importantly, risk management is embedded within all our business lines. At Huntington, everyone owns risk and we continue to operate within our aggregate moderate to low risk appetite.

Speaker 2

Finally, I want to reiterate, Huntington is built for times like this. We have a strong, well diversified franchise With a distinctive brand and loyal customers, our high quality deposit base, robust liquidity And solid credit metrics are the direct result of focused and disciplined execution over many years. We have an experienced management team supported by highly engaged colleagues executing on our strategy. And as you know, Management is collectively a top 10 shareholder and we are fully committed to driving top tier performance and growing shareholder value. Zack, over to you to provide more detail on our financial performance.

Speaker 3

Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our Q1 results. We reported GAAP earnings per common share of $0.39 An adjusted EPS of $0.38 return on tangible common equity or ROTCE came in at 23.1% for the quarter. Adjusted for notable items, ROTCE was 22.7%. Further adjusting for AOCI, ROTCE was 17.8%.

Speaker 3

Pre provision net revenue expanded 41% year over year to $844,000,000 Loan balances continued to grow as total loans increased by $1,500,000,000 from the prior quarter. Liquidity coverage remains robust With over $60,000,000,000 of available liquidity, representing a peer leading coverage of uninsured deposits of 136%. Credit quality remains strong with net charge offs of 19 basis points and allowance for credit losses of 1.9%. Turning to Slide 7, average loan balances increased 1.3% quarter over quarter driven by commercial loans, which increased by $1,500,000,000 or 2.2 percent from the prior quarter. Primary components of this commercial growth Included distribution finance, which increased $800,000,000 tied to continued normalization of dealer inventory levels, as well as seasonality with shipments of spring equipment arriving to dealers.

Speaker 3

Corporate and Specialty Banking increased $242,000,000 primarily driven by growth in MidCorp Healthcare and Tech and Telecom. Other Asset Finance Businesses Contributed growth of $216,000,000 Auto floor plan continued normalization with balances higher by $214,000,000 Business Banking also increased $92,000,000 In Consumer, growth continued to be led by residential mortgage, which increased by $316,000,000 Partially offsetting this growth were home equity balances, which declined by $159,000,000 All other categories including RV Marine and Auto declined by a collective $123,000,000 Turning to Slide 8. We continued to deliver average deposit growth in the Q1. Balances were higher by $472,000,000 primarily driven by consumer, which more than offset lower commercial balances. On a year over year basis, average deposits increased by $3,200,000,000 or 2.3%.

Speaker 3

Turning to Slide 9, I want to share more details behind Huntington's deposit franchise. Our deposit base represents a leading percentage of insured deposits at 69% as of Q1. Our deposit base is highly diversified with consumer deposits representing over half of our total deposits and the average consumer balance being $11,000 Turning to Slide 10, complementing our diversified deposit base Is the stability and growth of our deposits over time. During last year, we consistently delivered deposit growth well above peer levels Despite the backdrop of rising rates and quantitative tightening, through year end 2022, cumulative deposit growth was 2.4%, Nearly 6 percentage points better than the peer median. Over the course of Q1, monthly average deposit balances were stable At approximately $146,000,000,000 within consumer deposits, balances have increased for 4 months in a row.

Speaker 3

Total commercial balances were modestly lower consistent with expected seasonality. During March, in addition to seasonality, Commercial customers also incrementally utilized our off balance sheet liquidity solutions. Turning to Slide 11, We have a sophisticated approach to customer liquidity management that comprises both on balance sheet deposit products as well as off balance sheet alternatives. Over the past 4 years, we have invested substantially To build out these solutions to ensure we're managing our customers' overall liquidity needs, the enhanced liquidity solutions Allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off balance sheet solutions for investment or non operational funds. Over the course of 2020 2021, We intentionally leveraged these off balance sheet solutions in order to support our customers' excess liquidity.

Speaker 3

This resulted in fewer surge deposits coming on sheet as well as less commercial deposit runoff during 2022 compared to the industry. On a year over year basis, our Commercial Banking segment on balance sheet deposits Increased 11% and our off balance sheet liquidity balances increased 54%. During March, This approach yet again showed its value for both Huntington and our customers. We saw customers moving a modest amount of deposit balances into treasuries and other products, while we were able to maintain those primary operating accounts on our balance sheet. Of the total change in commercial segment deposit balances between March 6th and the end of Q1, we estimate that approximately half the delta Was attributable to normal seasonality and the remainder was mainly the result of shifts into our off balance sheet solutions.

Speaker 3

The bottom table highlights these movements as well as trends in the 1st 2 weeks of April. On balance sheet deposits have returned to the March 6th level And off balance sheet continues to grow. Turning to Slide 12. Our liquidity capacity is robust. Our 2 primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve Represented $10,000,000,000 $51,000,000,000 respectively at the end of Q1.

Speaker 3

As part of our ongoing liquidity management, we continually seek To maximize contingent borrowing capacity and as of April 14, our total cash and available borrowing capacity increased to $65,000,000,000 At quarter end, this pool of available liquidity represented 136 percent of total uninsured deposits, a peer leading coverage. On to Slide 13. For the quarter, net interest income decreased by $53,000,000 or 4% to $1,418,000,000 driven by lower day count and lower net interest margin. Year over year NII increased $264,000,000 or 23%. Net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis excluding accretion.

Speaker 3

The reduction in GAAP NIM included 5 basis points from lower spreads, Net of free funds, due to funding mix and marginally accelerated interest costs. It also included 5 basis points from the first Substantive negative carry impact from our long term downrate NIM hedging program and 3 basis points from higher cash levels. Slide 14 highlights our ongoing disciplined management of deposit costs and funding. For the current cycle to date, Our beta on total cost of deposits was 25%. As we've noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle.

Speaker 3

Given the recent market environment at the margin, we do expect a steeper near term trajectory. Turning to Slide 15, our hedging program is dynamic, continually optimized and well diversified. Our objectives are to protect capital in up rate scenarios and to protect NIM in down rate scenarios. During the Q1, we added to the hedge portfolio with both of these objectives in mind. On the capital protection front, We added $1,600,000,000 in additional pay fixed swaps and $1,500,000,000 in forward starting pay fixed swaptions.

Speaker 3

Throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedge position to manage possible downside rate risks over the longer term, as well as took actions to optimize the near term cost of the program. During the quarter, we executed a net $400,000,000 of received fixed swaps, terminated $4,900,000,000 of swaps and entered into $5,000,000,000 of floor spreads. As we've noted before, our intention is to manage NIM And as tight a corridor as possible as we protect the downside and maintain upside potential if rates stay higher for longer. Turning to Slide 16.

Speaker 3

On the securities portfolio, we saw another step up in reported yields quarter over quarter. We benefited from higher reinvestment yields as well as our hedges to protect capital. From a portfolio strategy perspective, We expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio. You will note that fair value marks at the end of March We're lower than year end, both in the AFS and HTM portfolios, as market interest rates moved lower sequentially. Importantly, we have also shown the $700,000,000 total positive fair value mark from our pay fixed hedges, which are intended to protect capital.

Speaker 3

Moving on to Slide 17. Non interest income was $512,000,000 up $13,000,000 from last quarter. These results include the $57,000,000 gain on the sale of our retirement plan services business during the quarter. Excluding that gain, adjusted non interest income was $455,000,000 This result was somewhat lower in the guidance we provided in early March, driven by lower capital markets revenues given the disruptions at the end of Q1. The Q1 is generally a seasonal low for fee revenues.

Speaker 3

As we've noted previously, we see Q1 excluding the RPS sale Being the low point and for fees to grow over the course of the year, driven by solid underlying performance in our key areas of strategic focus, Capital Markets, Payments and Wealth Management. Moving on to Slide 18, GAAP non interest expense Increased by $9,000,000 Adjusted for notable items, core expenses decreased by $18,000,000 driven by lower personnel expense, primarily as a result of reduced incentives and revenue driven compensation. We're proactively managing expenses and have taken actions over the last several quarters to orient to a low level of expense growth in order to deliver positive operating leverage and self fund strategic investments. Slide 19 recaps our capital position. Common Equity Tier 1 increased to 9.55 percent and has increased sequentially for 3 quarters.

Speaker 3

OCI impacts to Common Equity Tier 1 Resulted in an adjusted CET1 ratio of 7.6%. As a reminder, the reported regulatory capital framework Does not include OCI impacts in the capital calculation. Our tangible common equity ratio or TCE Increased 22 basis points to 5.77%. Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points. Adjusting for AOCI, our TCE ratio was 7.27%.

Speaker 3

Tangible book value per share increased by 7% from the prior quarter to $7.32 Adjusting for AOCI, Tangible book value increased to $9.23 and has increased for the past 4 quarters. Our capital management strategy For the balance of 2023, we will result in expanding capital over the course of the year, while maintaining our top priority To fund high return loan growth, we intend to grow CET1 to the top end of our 9% to 10% operating range by the end of the year. We believe this is a prudent approach given the dynamic environment. Based on our expectation for continued loan growth, We do not expect to utilize the share repurchase program during 2023. Turning to Slide 20, Our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity.

Speaker 3

On Slide 21, credit quality continues to perform very well. As mentioned, net charge offs were 19 basis points for the quarter. This was higher than last quarter by 2 basis points and up 12 basis points from the prior year as charge offs continued to normalize. Non performing assets declined from the previous quarter and have reduced for 7 consecutive quarters. Allowance for credit losses was flat At 1.9% of total loans.

Speaker 3

Turning to Slide 22, we've provided incremental disclosures on our commercial real estate balances. This portfolio is well diversified and its 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial. Over the last two years, we have grown our CRE book at a slower pace Relative to the industry and peers, we remain conservative in our credit approach to CRE with rigorous client selection. Total office CRE comprises less than 2% of total loans and the majority are suburban and multi tenant properties.

Speaker 3

Reserve coverage on our total CRE portfolio is 3% and the office portfolio is 8%. Let's turn to our 2023 outlook on Slide 23. As we have discussed, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. We also remain dynamic in the current environment as we execute on our strategies. Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook.

Speaker 3

We have also based our guidance On a range of interest rate scenarios, bounded on the low end using the forward curve as of the end of March To one at the higher end, where rates are higher for longer with Fed funds remaining at approximately today's level over the rest of the year. On loans, our outlook range continues to be growth between 5% and 7% on an average basis. And as before, we expect this growth to be led by commercial with more modest growth in consumer. As we entered the year, We were trending to the middle to higher portion of that growth range. Given the market disruption and our incremental focus On optimizing loan growth for the highest returns on capital, we now expect to be in the lower half to midpoint of this range.

Speaker 3

On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships. We're narrowing our outlook With a slightly lower top end of the range and still expect to grow average deposits between 1% 3%. However, the composition of deposit growth from here, we now expect to be primarily consumer led with relatively less commercial growth. Net interest income is now expected to increase between 6% 9%. This is driven by slightly lower loan growth And marginally higher funding costs.

Speaker 3

Non interest income on a core full year basis is expected to be flat to down 2%. The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go forward impact of the RPS business sale. As noted, we expect Q1 to be the low point for fees, growing over the course of the year, led by Capital Markets Payments and Wealth Management. On expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level. We're benefiting from our ongoing efficiency initiatives such as Operation Accelerate, branch optimization, The voluntary retirement program and the organizational realignment, providing the capacity to self fund Sustained investment in our key growth initiatives.

Speaker 3

Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce The expense growth in 2023. For the full year, we now expect core expense growth between 1% 3%, Plus the incremental expenses from the full year run rate of Capstone and Tarana and the increased FDIC insurance expense. Overall, our low expense growth coupled with expanded revenues is expected to support another year of positive operating leverage. We continue to expect net charge offs will be on the low end of our long term through the cycle range of 25 basis points to 45 basis points. Finally, turning to Slide 24.

Speaker 3

As you heard from Steve, the foundation we have built at Huntington over the last decade Has created an institution that is well prepared for this environment. We will leverage the strength of our deposit base. We're focused on growing capital And maintaining robust liquidity. We remain disciplined in our credit posture and we're executing our core strategy. The work we have done to build the franchise positions Huntington to outperform and be ready to opportunistically seize on pockets of growth.

Speaker 3

We will remain disciplined and dynamic in our management approach as we continue to generate long term value for our shareholders. With that, we will conclude our prepared remarks and move to Q and A. Tim, over to you.

Speaker 1

Thanks, Zach. Operator, we will now take questions. He or she can add themselves back in the queue. Thank you.

Operator

Thank you. And at this time, we will conduct our question and answer session. One moment please while we poll for questions. And our first question comes from Manan Gassalia with Morgan Stanley, please state your question.

Speaker 4

Hey, good morning.

Speaker 1

Mark and

Speaker 4

Ananda. As I look through your deposit flows for the quarter, you've clearly done better than peers, whether On total deposits or even just non interest bearing deposits, can you break out what you saw in the background? Was there a lot of Movement with new accounts coming in and some of those existing commercial clients moving off balance sheet. And if so, can you talk about how sticky you think some of those new account openings are?

Speaker 5

This is Zach. I'll take that question, and it's a good one. Overall, what we saw in our deposit base during the quarter was tremendous stability, And that continued not only through the month of March, but into early April. We've tried to provide some incremental disclosures around that so that you could Get the visibility and for us, it's not surprising as we've noted quite a bit. It's very granular, very diversified And overall, it didn't happen by accident.

Speaker 5

It was a function of a really long strategy. We have to focus on primary bank relationships, as you know, And to develop this commercial off balance sheet capability that we described in the prepared remarks. To get to your question in particular, What we saw generally, I would note by the way, that when you're looking at balances on a day by day basis as we provided them In that disclosure, you have to take them with a note of caution. It really matters what day of the week, what week of the month, etcetera, payroll days and tax payments, etcetera. Generally, we expect The end of March to be a seasonal low for commercial.

Speaker 5

And so most of the movement around half the movement we saw In commercial, from, let's say, the average of March down to the end of March, was really just BAU movements Of commercial clients largely paying out payroll. The other half was largely movements of deposits off Balance sheet has very marginal amount of customers used to those off balance sheet solutions to leverage that product set. Interestingly, what you can see, we provide this disclosure out into the 1st 2 weeks of April, is that essentially completely came back in terms of the overall balance So it's very stable net to virtually no movement. On the question of So what we saw in the analysis, we, of course, saw some acquisition that we continue to acquire in every segment that We're operating in consumer business to acquire business banking and commercial as well. And so we feel good about that kind of long term program,

Speaker 4

Great. And then Just separately, can you talk about the funding and liquidity side of the balance sheet? So despite the low level of deposit outflow, I think you built up some cash and liquidity levels by taking on more wholesale funding. So how should we think about that as we get through the rest of this year?

Speaker 5

Yes. In terms of overall funding mix, we've talked about this a number of times in prior quarters. We really like where we are coming to this rate cycle from a perspective of lots of balanced options to fund the business. We're growing loans at this point between 5% and 7%, and deposits are between 1% and 3%, around 2%, call it, the midpoint of that range. So that allows us to also leverage other sources of funding to overall fund the balance sheet, and We're in a great position to be able to do that.

Speaker 5

I will tell you internally, we really like that. It creates quite a bit of tension in the system Where the next unit of funding is coming and really that it's optimized from an economic perspective. And so our expectation is to continue to Essentially, add to each of those funding categories over the foreseeable future, while still maintaining a level that's comparatively quite good relative to history for us. So So that's the overall plan. On the topic of liquidity, I would just note a couple of things.

Speaker 5

This is a Key risk that the company has been focused on managing for more than a decade. We purposely create exceptionally robust pools of contingent liquidity to cover any potential issue. I think we noted in the prepared deck Some of the key sources of liquidity and also noted that we continue to over time add to them. I will tell you that one of the statistics that's in the document today highlights $65,000,000,000 of Contingent cash and borrowing capacity as of last Friday, I'm pleased to report that as of this morning, there's an incremental efforts we've done now $84,000,000,000 which in total represents 187 percent relative to our insured deposits. So exceptionally strong liquidity profile and As I said, very balanced funding mix.

Speaker 4

Great. Thank you.

Operator

Our next question comes from John Pancari with Evercore. Please state your question.

Speaker 5

Hey, John.

Speaker 6

Good morning.

Speaker 5

Hi, Brent.

Speaker 6

You mentioned the actions you're taking incrementally To lower expense growth across the firm, are those actions factored into your 1% to 3% Extend guidance and also what are the what are those actions involved? Thanks.

Speaker 5

Yes. It's a great question, John. This is Zach. I'll elaborate on that. So the short answer to your question is yes.

Speaker 5

Our guidance of 1% to 3% underlying core growth Includes those actions. And I think just back to the sort of strategic intent of it, as we've said for a while, we are Very intense on driving a low level of overall expense growth and really leveraging Our ongoing program of efficiency initiatives to do that, even while we continue to drive outsized growth and self fund Investments within that overall low growth framework. And so as we came into this Updated guidance period, we saw somewhat lower revenue trajectory. For us, it was important And to kind of continue to execute on the discipline of driving deposit of operating leverage to also ratchet down expenses. I think that the kind of things that we do, we always enter the year with a contingent set of expense management Options, a menu, you could think about it as a different kind of options we could undertake if we need to.

Speaker 5

And that's essentially what we're going to go through now. We'll modulate the pace of hiring. We'll be very judicious In the discretionary expense categories, and we will look at sort of every possible area of expense control to ratchet back expenses and offset a good amount of what was otherwise profit and revenue pressure. So That's the playbook. And we that's something we've done numerous times over the course of the years.

Speaker 5

And We feel really good about our ability to execute again now. Okay, great. All right, thanks. And

Speaker 6

then On the back to the balance sheet, can you just give us your expectation in terms of an updated through cycle deposit data? I I believe you had expected 35% previously, but if you can update us there on what you're thinking and also what net interest margin outlook is baked into your up 6% to 9% net interest income projection? Thanks.

Speaker 5

You got it. Yes, let me elaborate more on that. Overall, pulling back, overall, the strategy we have is to continue to drive Sustained growth in net interest income on a dollar basis and to do that driving continual growth in high return loan categories, Coupling that with the management of NAM around, we're in as tight a corridor as we can. We're the top end benefits from our continued asset sensitivity, and We stand to really benefit if rates do stay a lot higher for longer, but also at the lower end, protected with our hedge portfolio. All that adds up to the 6% to 9% NII growth that we're guiding On beta, particularly to answer your question, it clearly is a more competitive environment.

Speaker 5

But hence, it's realistic to expect some Higher beta and frankly an earlier impact than we had previously seen. I do expect now a few percentage points higher Than the original than the prior guidance of 35% beta. I will note that We provide guidance on beta because we want to give you an indication of where we think that's going. But for us, the most important thing is the execution day to day driving the deposit growth and staying incredibly disciplined in terms of the overall funding mix, as I noted in my prior response. How beta ultimately plays out here over the end game is going to be clearly a function of where the yield curve goes.

Speaker 5

But I do think that A few percent higher than 35% is a reasonable range based on the two scenarios I laid out. In terms of overall spread, as we noted, we've moved the guidance range from It was previously 8% to 11% to 6% to 9%, so down about 2% in terms of that guidance range. About 40% of that is just slightly lower loan growth and the rest is spread. As I think about the kind of the way The year plays out. I would expect that kind of a more front loaded impact of spread than we were previously expecting.

Speaker 5

So we would expect To see a dollar decline in NII in Q2, about the same as we saw in Q1, but then growing from there. And I think the NIM range that we have there is sort of consistent with that dollar trend.

Speaker 6

Great. Thanks, Zach.

Speaker 5

Thank you.

Operator

Thank you. And our next question comes from Ebrahim Poonawala with Bank of America. Please state your question.

Speaker 7

Hey, good morning.

Speaker 5

Good morning, everyone. Good morning, everyone.

Speaker 7

Two questions. 1, in terms of the Deposit growth outlook, I think you mentioned it's expected to be more consumer led. Just give us a sense of How either the interest rate environment or the events of the last month have changed how you are thinking about deposit acquisition? And has it materially changed the pricing on a new deposit growth relative to how you thought about it back in January?

Speaker 5

Yes. Thanks, Ebrahim. Overall, I would say, as we noted, we've tightened the range with a kind of a lower At top end, we still expect growth and pretty consistent with what we had thought before in terms of the overall amount of growth. So we still see nice traction. And I think we We've seen that a little bit in some of the disclosures we've given just in the 1st month of April 1st weeks of April, for example.

Speaker 5

With that being said, I think the mix will be different. And we now expect commercial to be largely flat from here and really the growth to be consumer led. Frankly, from our perspective, it's a great highlight of the strength of the consumer franchise that we've got, that we can lean in now and We continue to support high profit loan growth with that consumer funding. I think the dust is not fully settled in terms of all of the competitive And customer behavioral impacts of the last month, but I think one of them will clearly be more moderated commercial growth. It will just be leveraging the off balance sheet There's that much more to ensure that what we do have on sheet is incredibly stable.

Speaker 5

And on the consumer side, It's just running the same playbook that we have. We have invested so much over the last few years in capabilities to build Our marketing technology and customer targeting capability within the consumer that we really have the opportunity now to optimize And to drive incremental consumer oriented acquisition, not only of higher rate categories, but just fundamentally, We're growing, we noted 2% growth in primary bank relationships on the consumer side, 4% growth In Business Banking, and so it's a very balanced source of growth and we're just going to lean into it at this point to continue for overall deposit balances.

Speaker 7

Got it. And just as a follow-up, I guess, on the lending side. So appreciate your comments in terms of where the growth has been and the outlook. But if you could give us a sense of just customer sentiment, given your business mix, some of the legacy TCF businesses, Just the health of the economy in terms of when you speak to your customers, are you seeing a slowdown in demand also occurring at the same time, which increases the likelihood of A potential downturn in the recession based on what you're seeing?

Speaker 5

Ebrahim, this is Steve, and thank you for the question. We are seeing customers become more cautious, in some cases, deferring investments And or postponing acquisitions or other transactions. And this has increased During the quarter, it's one of the reasons we've sort of guided without changing the loan range To the lower end of that loan range from where we would have been at the upper end of that loan range at the end of There's a clear clearly more angst about is there a recession and what might 2024 look. Having said that, many of these customers are doing quite well in 2023 thus far and remain optimistic. But again, there's been a lot of media, a lot of headline noise, and it's having an impact in addition to what the Fed is doing.

Speaker 7

Thanks, Steve. Thanks for taking my questions.

Speaker 5

Thank you. Thank you, everyone.

Operator

Thank you. Our next question comes from Scott Siefers with Piper Sandler, please state your question.

Speaker 5

Good morning, everyone. Thank you. Hi, Phil. Zach, I was hoping you could Expand upon some

Speaker 8

of the NII comments from a question or so ago. So I think if I interpreted you correctly, I guess NII will take a step down In the Q2, what would cause either margin or NII to start expanding from there in light of, I guess, fairly Limited overall balance sheet growth through the remainder of the year? Just curious about the nuances as you see them.

Speaker 5

Yes. I mean, mainly it's going to be volume from there, Scott, just continue to sequentially grow loans From 2nd into 3rd, and 3rd into 4th quarter is the primary driver. We see the spreads much more flat in the back half Then kind of accelerated impact. What I just maybe elaborate a little bit on kind of the NIM trajectory that we see leverage overly precise. When we walked into the year, we were expecting, frankly, a pretty ratable trend in NIM over the course of the year.

Speaker 5

I think at the time, we provided some guidance around single digit basis points Throughout the course of the year, most of that we now see kind of front loaded just based on the shape of the curve and kind of how the outlook has No shaped up at this point. So that's really the driver. Overall, my outlook for NIM is maybe 5 or 6 basis points lower on a full year basis to give you a sense, a A portion of which is yield, but most of which is responding to cost being slightly higher.

Speaker 8

Okay. Perfect.

Speaker 5

Scott, you'll remember, we are A large equipment finance lender and that generally has much more activity in the Q4 that's part of this 2nd half, Bill Zitzak, now reference.

Speaker 8

Okay, perfect. Thank you. And then can you guys Speak broadly to some of the trends you're seeing in the auto portfolio. I mean, I know your portfolio, Just given the quality and tenure of it, it tends to be a lot different than the industry as a whole. But at least in the media, You would think that the industry is sort of collapsing, I guess.

Speaker 8

Just curious that top level trends sort of appetite From you guys and then what you're seeing at sort of overall.

Speaker 5

Scott, it's Rich. I'll take that and then Zach Steve can tack on to it. So from my standpoint on the credit side, as we showcased during Investor Day, I mean, this is really a business we like through all sorts of cycles. It has become truly the core competency of the bank. If you look at what we saw in the Q1, it was a continued gradual normalization in Both delinquencies and charge offs, but it's still trending well below the historic losses that we would normally see.

Speaker 5

It was 14 basis points In the Q1, up from 12 in the Q4. From my standpoint, I look really closely at the origination metrics So we've got we're still originating at FICO's north of 780, and the loan to values are remaining Relatively constant, reflecting a little bit more mix in new versus used. So from my standpoint, We're going to expect this portfolio to continue to show pure best loss performance. And unemployment rates are still low, which Certainly going to help the credit metrics here. That's the big driver of losses.

Speaker 5

So I'm feeling good about it. And maybe Zach can talk about the optimization that we've got from a return on capital standpoint. Sure. I'll just tack Just a second to comment that the Virtis Way, we feel great about the trajectory of the portfolio. We still see sustained demand and great relationships, In terms of optimization, that is one of the loan categories that we are actively modulating.

Speaker 5

We kind of detailed this at Investor Day last November. I should remember that that's a business that is so effectively managed with respect to Pricing and volume trade offs, we can really pull those levers quite effectively to drive higher return and higher yield And so we're bringing back production a bit and seeing Really strong returns as a result of it. So we'll see some of that and continue to optimize as we go forward for the rest of the year. That is totally important business for us and we're pleased with the trends we see.

Speaker 8

Okay, perfect. Thank you for all the color.

Speaker 5

Thank you.

Operator

Our next question comes from Erika Najarian with UBS. Please state your question.

Speaker 9

I just had one follow-up question for Steve. Steve, your starting point CET1 is 9.5%. You accrete about 20 basis points of capital or more in the quarter. And like you said, your allowance already account for a tougher economic environment. I think your shareholders Absolutely appreciate the focus on returns.

Speaker 9

But do you see an opportunity for Huntington Perhaps as we have a little bit more clarity on the downside to the macro backdrop to take advantage of that capital and reserve Resilient, so to speak, and perhaps start thinking about Being more opportunistic in market share taking?

Speaker 5

Yes, Erika, thanks for the question. We do We have focused on and will continue throughout the year building the capital, position the We're quite pleased with the results delivered in the Q1 and look for comparable results as we go through the year. We're intending to be at or near the high end of our CET1 range. And we're doing that with a view that this Threat of a recession is increasing, and there's also a backdrop that is there going to be some kind of regulatory action At some point in the foreseeable future around capital requirements. So with that in mind, that's the purpose of it.

Speaker 5

Having said that, we intend to be opportunistic. We've got a lot of organic growth potential in the business We're very focused on our execution. And as you saw last year with the acquisition of Capstone in Toronto, we're always looking to build out ancillary feed businesses within the company. Beyond that, in times of disruptions, there tend to be People or teams that might be available, and we'll again be look to be opportunistic there. And we see this in aggregate as a moment to take market share, and that's what we're We are investing in the businesses.

Speaker 5

The outlook Zach has shared with you will have continued investment in the businesses, all of which is designed to enhance our Roll our earnings and enhance our returns.

Speaker 9

Got it. And just to be Steve, I was asking about organic opportunities. That wasn't a hidden bank acquisition question.

Speaker 5

I'm glad you clarified. I

Speaker 10

thought you

Speaker 5

might be going in a different direction.

Speaker 9

Yes, absolutely. And just as a follow-up to that, Zach, heard you loud and clear in terms of continuing to optimize the right hand side of your balance sheet. No, as you think about senior debt issuance, I suspect that everything that you may be doing in the future would have a lens towards The potential for TLAC eligibility?

Speaker 5

It's certainly on the thought process, Erica. Yes, we're watching that Development carefully. Still pretty early days clearly to see where that might land, but it's part of the thought process.

Speaker 9

Thank you.

Operator

Our next question comes from Ken Usdin with Jefferies. Please state your question.

Speaker 11

Thanks. Good morning.

Speaker 5

Just one

Speaker 11

follow-up on the capital front. Zach, you show on that Slide 19 where the current Potential impact of AFS would be on CET1. I'm just wondering, do you have a rule of thumb if we kept all rates equal on just How fast that would pull to par either on a sequential basis or maybe by the end of 'twenty four?

Speaker 5

Yes. It's a great question, but considerable analysis around It's around 5% to 10% a year depending on which year it is, which your maturities are, so like a totally flat I'll give you a sense, we've just run this analysis on the forward curve. As of March, It will be 42% recaptured by the end of 2024 in a forward curve scenario, always benefiting in that one Of interest rates declining relative to current flat scenario.

Speaker 11

Great. Thank you. And just one question on the assets Re pricing side, you guys have some fixed rate assets that are still repricing even though I understand how you're slowing production. Just can you give us a sense on just what your Front book, back book benefits are in some of your fixed rate portfolios? And have we even really started to see some of those benefits come through given where rates have moved to?

Speaker 5

Yes. It's a great question. You can look at that very carefully, and we're seeing really nice step up in loan yields. New volume rates up almost 50 basis points sorry, new volume up almost 70 basis points, back book up almost 50 basis points In Q1, we estimate that our loan beta at this point through Q1 is 37%, and that could easily be over the next couple of years Approaching 60%. So if you just sort of model the yield curve.

Speaker 5

So we're a little further through the loan beta than we are in the deposit beta, but not much. And there's certainly much more room to go in terms of loan yields from here. Just given kind of about Just over 10% of the portfolio is in auto. The turn is pretty quick, just over 2 years. So kind of get the We've got repricing and somewhat delayed but impactful data there.

Speaker 5

And then obviously, the sort of the longer dated Louisville, likewise, is seeing a nice reset in terms of rates, and it's a lot of benefit for us over the coming quarters as well. Okay.

Speaker 8

Thanks, Zach.

Operator

Thank you. Next question comes from Jon Arfstrom with RBC. Please state your question.

Speaker 12

Thanks. Good morning, everyone.

Speaker 1

Good morning, John. Good morning, John.

Speaker 12

A few questions here. Zach, on Slide 14, That green line on the bottom, the last tightening cycle, it took a couple of quarters for deposit cost to roll over Did the Fed stop? If we're done in May, do you think that relationship holds? Does it is it 2 quarters and deposit costs stop going up? Is that fair?

Speaker 5

That's generally the expectation we've got, John, yes, based on just prior earnings cycles. Obviously, I know you know as well, it's going to be It will kind of function of the pace with which rates might begin to decline and also what the kind of economic environment, hence the loan growth environment across the industry that would affect the competitive environment on deposits. So that will clearly play into it. But generally, our planning assumption is, As you know, which is very much in keeping with what we've seen not only in the last rate cycle, but in multiple rate cycles before that.

Speaker 12

Okay. Fair enough. Steve or Rich, maybe for one of you, you used the term in the deck rigorous client selection for commercial real estate. Can you talk a little bit more about that, what you go through, help us understand the type of work you do and do you think this is different than what your peers are doing?

Speaker 5

I really can't speak to what our peers are doing, but I can tell you that we, for years now, have developed a process Really fine tuning who we do business with in this space. As you know, it's real estate cycles and you have to be able to depend on Who you're doing business with to support their projects. And so we have really narrowed the funnel around the types of sponsors that we work with. And we hear them. We look at their just how long they've been in business.

Speaker 5

We look at their financial wherewithal. We look at their liquidity. And more importantly, we look at how they've behaved in past cycles and we cure them and our curing drives how much we'll have out to any particular sponsor, how big of a single project we will have to them and other metrics associated with that. So right now, we are focused on serving the core and that has served us well going forward. John, we're always disciplined on our credit.

Speaker 5

I think that's going to prove to be the case as we come through the cycle. Obviously, I'm pleased with where we are at the moment. So we'll see. But I can tell you, especially in Cree, where we had enormous challenges in 2008, 2009, We have sustained the discipline here since that time, and Rich has been a big part of it along with our lending teams.

Speaker 12

Good. One more for you, Steve. I know this seems like a softball, but it's not. I'm genuinely curious. But what surprised you the most over the past 6 weeks as you managed through some of this disruption?

Speaker 5

The speed of the run on the banks was a surprise, John, faster than anything we've seen That I can ever recall. And I think as a consequence, it left Regulators and others may be a little behind what they would be because they didn't expect it either. And that's why I think it's a couple of weeks to get SVP resolved and Signature as well. Normally, there's more front end planning. They have a chance to light things up.

Speaker 5

This turned into a little bit more of a scramble. Having said that, I thought the reaction on that Sunday night From treasuries and SGX, it was just outstanding timing and fully appropriate.

Speaker 12

Okay. All right. Thank you.

Operator

And our next question comes from Steven Alexopoulos with JPMorgan Chase. Please state your question.

Speaker 10

Hi, everybody. Hi, Stephen. I wanted to start. So on the net interest income Outlook, which was taken down a bit. Given everything Zachary detailed on the swaps and the forward curve, as of right now, where do you So you got yourself trending within that.

Speaker 10

Is there a bias either to the upside or downside within that range right now?

Speaker 5

When we set these ranges, we try to set them with our general expectation being right and then collect. So that's kind of the baseline expectation. I think kind of what the puts and takes that would take you to the high and the low included volume on one hand and just sort of The shape of the yield curve and the competitive environment on the other hand, so it's hard to generalize, but we feel quite good about Landing in that range at this point and that's what we're driving toward.

Speaker 10

Got it. And is the way we should think about it, so if we're at the low end, say, of The NII range, should then we should be at the low end of the expense guidance? Should we just connect those 2?

Speaker 5

Generally speaking, that is the way we think about We throttle the expense growth based on where the revenue trajectory is going. And that's why we try to have a really disciplined forecasting process with, As we've said, multiple economics in Arizona, we can try to do that. Obviously, the expense lever takes some time to pull. And so you need to have good line of sight to where that's going. And so It's possible there's a rapid move or a surprising move, but that's not possible in a given shorter time period.

Speaker 5

But over the longer term, yes.

Speaker 10

Got it. Okay. Thanks. And maybe just one last one for Steve. Just following up on your responses now to John's question, given the Speed at which deposits went out, Silicon Valley Bank, when you look at that, do you view that from a distance as a unique One off event or are there lessons that you're now applying the way you think about managing capital, risk, liquidity That even a stable regional bank like yourself will change potentially fairly materially in the aftermath of what we just saw.

Speaker 10

Thanks.

Speaker 5

Steve, I think there are always lessons learned, but the business models of STB and Signature We're so different from us and other regional banks, but particularly from us. The concentrations, the uninsured deposit level of 95%, Just in retrospect, it seems rather clear that the liquidity risk was Very, very different and a huge mix combined with their asset liability. In terms of lessons for us, it's made us even that much more Aware of liquidity, we've always viewed this as a prime risk. We've always had good backup, and we've been very granular And I've managed to have that best in class uninsured to total deposit ratio. But we'll probably be even more cautious, not probably we will be even more cautious given the speed at which things move as we go forward.

Speaker 5

Having said all that, we're in a very strong position today. We expect to grow deposits as we continue through the year. And so it's like extra vigilance. We may do some policy adjustments to reinforce and strengthen further. But that will be of a minor nature.

Speaker 5

I don't think it will impact our performance.

Speaker 10

Okay. Thanks for taking my questions.

Speaker 5

Thank you.

Operator

Thank you. And ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Mr. Steiner For closing remarks,

Speaker 5

So thank you very much for joining us today. As you heard, we're operating from a position of strength with a foundation that's been built over a long period of time. We're very, very focused on continued growth and intend to be opportunistic. We're confident in our ability to continue creating value for shareholders. As a reminder, the Board executives and our colleagues are a top 10 shareholder collectively, reflecting our strong alignment with Our shareholders.

Speaker 5

So thank you for your support and interest in Huntington. Have a great day.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your

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Earnings Conference Call
Huntington Bancshares Q1 2023
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