Huntington Bancshares Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 17, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Huntington Bancshares 20 24 Third Quarter Earnings Review. At this time, all participants will be 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 your host, Tim Sedabris, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website, www.huntington.com. 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 Steinour, Chairman, President and CEO and Zach Wasserman, Chief Financial Officer.

Speaker 1

Brendan Lawler, 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 to Steve.

Speaker 2

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are very pleased to report outstanding results for the Q3, which Zach will detail later. 2024 continues to be a dynamic year and our year to date results demonstrate Huntington's strength and consistent performance.

Speaker 2

These strong results reflect the dedication of our nearly 20,000 colleagues across the bank who live our purpose every day as we make people's lives better, help businesses thrive and strengthen the communities we serve. Now on to Slide 4, there are 5 key messages we want to share with you today. 1st, we are driving accelerated loan growth along with sustained deposit growth. These results are supported by our core businesses as well as the successful execution of new initiatives, including expanded geographies and commercial banking verticals. 2nd, we are actively executing our down beta playbook as the market enters a declining Fed rate cycle.

Speaker 2

We are dynamically managing the balance sheet and coupled with our growth outlook, we expect to deliver record net interest income in 2025. 3rd, we continue to drive fee revenues higher with sustained momentum across our 3 major focus areas: payments, wealth management and capital markets. 4th, our credit performance remained strong during the quarter with stable net charge offs as well as lower non performing and criticized assets. This is a direct result of our consistent disciplined credit management and our aggregate moderate to low risk appetite. Finally, our performance during the quarter set the foundation for continued organic growth and increased profitability into 2025 beyond.

Speaker 2

I will move us on to Slide 5 to recap our performance. We delivered accelerated loan growth in the quarter with average balances growing by 3% from a year ago and the period loans increased at a 6.3% annualized rate. Average deposit growth continued at a robust pace increasing by $8,300,000,000 or 5.6 percent over the past year. We drove capital ratios higher again with adjusted common equity Tier 1 of 8.9%. This benefited both from capital accretion from earnings as well as reduced AOCI.

Speaker 2

Our fee revenue strategies are delivering with GAAP fee income increasing by 3% year over year. On an adjusted basis, core fee revenues demonstrated robust growth increasing by 12% from a year ago, driven by payments, wealth management and capital markets. We are sustaining momentum in the growth of primary bank customer relationships. As we continue to acquire new customers across the footprint, consumer PBRs have increased by 2% and business banking PBRs have increased by 4% year over year. We have delivered PBR growth consistently with year over year increases for over a dozen consecutive quarters.

Speaker 2

We have continued to invest across the company to drive sustained organic growth. Last month, we were pleased to announce our full franchise and branch expansion into the Carolinas. This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year. These markets represent some of the most attractive geographies nationally given their size and growth characteristics. We've hired well established colleagues with local expertise in these markets and the results today are tracking much better than our initial business case.

Speaker 2

We've also invested substantially in our payments businesses, particularly in treasury management, including bringing in house our merchant acquiring capabilities. The merchant acquiring business completed its final testing phase in September and implemented its full commercial launch in early October. The opportunity within merchant is substantial and when at scale, we expect it will add 1 percentage point to overall fee revenue growth. Credit trends overall are holding up very well, supported by our long track record of disciplined client selection. Our consumer portfolios are constructed around prime and super prime exposures.

Speaker 2

Within these portfolios, consumer delinquency rates remain stable. We are continuing to see sound fundamentals from our commercial customers. They have managed this rate cycle and inflationary changes well with stable revenue and profitability trends. Overall, our customers continue to show strength and resiliency, which supports a constructive outlook for sustained organic growth. We exited the Q3 with robust production levels in September and with momentum that has carried into the Q4.

Speaker 2

As an example, our regional banking group posted record loan production ex PPP in the 3rd quarter. Heading into the 4th quarter, late stage commercial pipelines at quarter end are up 68% from a year ago. Our teams are actively implementing our down beta action plans. Fee revenue growth was robust in the Q3 and we have confidence in our many initiatives including merchant acquiring as well as the outlook for capital markets and advisory revenues given strong pipelines as we enter the Q4. We are maintaining disciplined expense management while continuing to invest.

Speaker 2

The additional efficiency actions we took in the Q3 will support our ability to sustain investment into revenue producing initiatives into 2025. Credit remains a hallmark of Huntington with stable charge offs and improved non performing and criticized assets. In closing, we have confidence in our ability to sustain our organic growth outlook as we finish the year and move into 2025. Zach, 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 3rd quarter results. We reported earnings per common share of $0.33 The quarter included $6,000,000 of notable items on a net basis and did not have an impact to earnings per share. Return on tangible common equity or ROTCE came in at 16.2% for the quarter. Adjusted for notable items, ROTCE was 16.3%.

Speaker 3

Pre provision net revenue or PPNR increased by 8.3% from the prior quarter. This was driven by net interest income, which expanded by 2.9% and fee revenues, which increased by 6.5% from the prior quarter. Average loan balances increased by $3,700,000,000 or 3.1% versus last year. Average deposits continued to grow increasing by $8,300,000,000 or 5.6 percent on a year over year basis. Credit quality remains strong with net charge offs of 30 basis points.

Speaker 3

Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.93%. Adjusted CET1 ended the quarter at 8.9% and increased roughly 30 basis points from last quarter. Supported by earnings as well as the recapture of AOCI from lower rates, tangible book value per share has increased by 21.5% year over year. Turning to Slide 7. Consistent with our plan and prior guidance, year over year average loan growth is accelerating.

Speaker 3

Q3 loan growth was 3.1% year over year, rising from last quarter's 1.7% growth and the 1.3% we posted in Q1. Average loan balances increased sequentially by $1,100,000,000 Excluding runoff from commercial real estate, loans increased by $1,600,000,000 or 1.3%. As Steve mentioned, end of period loans increased by 1.6% and represented a 6.3% annualized growth rate. Loan growth in the quarter was supported by strong contributions from core businesses and from new initiatives. Our new initiatives collectively represented $700,000,000 of growth in the quarter and included Carolinas, Texas, Fund Finance, Healthcare Asset Based Lending and Native American Financial Services.

Speaker 3

Note this pace of growth was above the 2nd quarter level as teams continue to ramp up and we expect growth in the 4th quarter to be further above these levels. Other drivers of loan growth in the 3rd quarter included $595,000,000 from consumer auto, dollars 268,000,000 from regional banking, dollars 165,000,000 from residential mortgage, dollars 137,000,000 from auto floor plan, $80,000,000 from RV Marine, dollars 131,000,000 from all other consumer categories on a net basis and $109,000,000 from all other commercial categories on a net basis. This growth was partially offset by seasonal decline in distribution finance, which was lower by $747,000,000 Generally, we see the Q3 as the seasonal low point in the year for this business, given inventory levels across our mix of programs. We expect inventories to build into the 4th quarter and resulting balances to be higher in the 4th quarter on average compared to the 3rd quarter. Turning to Slide 8.

Speaker 3

As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2,900,000,000 or 1.9 percent in the 3rd quarter. On a full quarter basis, total cost of deposits increased by 2 basis points in the 3rd quarter and interest bearing deposit costs were flat for the quarter. Within the quarter, there were notable declines in deposit costs. We saw total cost of deposits decline sequentially in both August September with September costs lower by 7 basis points.

Speaker 3

This is a direct result of our proactive and disciplined execution of our down beta action plans in advance of the Fed's 50 basis point rate cut in September and continuing into Q4. These actions reflect our active balancing of deposit volumes and rate. Given our robust deposit growth over the past year, we're in a strong position to optimize rates from here. We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves. Our forecast is aligned with a forward curve which projects 2 additional 25 basis point rate cuts by year end and a further 5 25 basis point rate cuts in 2025.

Speaker 3

As we noted in the past several quarters related to guidance on up beta, the performance and trajectory of down beta will be a function of the actual and projected path of rates and importantly customer expectations for that path. Based on the current rate outlook, we continue to project a cumulative down beta in the mid to high 30s by the Q4 of 2025 and in the mid-40s range by the Q4 of 2026. Turning to Slide 9, our cumulative deposit growth since early 2023 totaled 7.1%. This level continues to well outpace the peer group. As a result, we've been able to decisively implement the down beta strategy, fund loan growth with deposits and at the same time manage the loan to deposit ratio lower over the past year, which will support the continued acceleration of lending.

Speaker 3

On to Slide 10. For the quarter, net interest income increased by $39,000,000 or 2.9 percent to $1,364,000,000 We delivered sustained growth off of the trough levels from the Q1 of this year consistent with our guidance. Net interest margin was 2.98% for the Q3. Reconciling the change in NIM from Q2, we saw a decrease of 1 basis point. This was due to spread net of free funds lower by 2 basis points, higher cash balances driving margin lower by 2 basis points, partially offset by lower drag from the hedging program, which improved by 3 basis points.

Speaker 3

We continue to project full year net interest income to be within our prior guidance range. The 4th quarter level is expected to be flat to up 1% on a year over year basis and then resume growth over the first half of twenty twenty five and accelerate in the second half. This is expected to result in record net interest income for 2025 based on current rate curve expectations. We continue to benefit from fixed rate loan repricing with loan yields expanding by 4 basis points from the prior quarter. This occurred even as SOFR moved lower during the quarter.

Speaker 3

As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short term rates as well as the slope and belly of the curve. As I noted earlier, our working assumption includes 2 additional rate cuts by year end and a further 5 cuts in 2025 and underlies this net interest income outlook. Turning to Slide 11, our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percentage of total average assets to remain at approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in treasuries and expect to manage the unhedged duration of the portfolio at approximately the current range.

Speaker 3

We have increased the average duration of new securities purchases from very short half year duration to slightly longer 2 to 3 year durations, which is a component of our strategy to systematically reduce asset sensitivity over the next several quarters. Turning to Slide 12. Over the course of the rate cycle, we've positioned the company to benefit from asset sensitivity as the rate environment moved higher and are now reducing our level of asset sensitivity as market expectations are increasingly weighted toward a down rate path. That strategy has worked well to maximize the benefit from the rate cycle and protect capital, while managing NIM within a tight corridor. On the bottom of the slide, there is an illustration of the asset sensitivity path over the next several quarters.

Speaker 3

In Q3, we lowered our asset sensitivity by more than 1 third from the 2nd quarter. Looking forward, we expect the total cumulative reduction in asset sensitivity from Q2 to be greater than 50% by year end 2024 and moving to above 60% by mid-twenty 25. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization. Moving on to Slide 13. On an overall level, GAAP non interest income increased by $32,000,000 to $523,000,000 for the 3rd quarter.

Speaker 3

Adjusting for the impacts of CRT transactions and the pay fixed swaptions mark to market from the prior year, fee revenues increased by $55,000,000 or 12% on a core underlying basis. Moving on to Slide 14, our strategy to increase the penetration and usage of value added fee services is building on momentum we've created over the last several years. Adjusted fee revenues as a percentage of total revenues have increased from 25% a year ago to 28% in Q3. This reflects the focused effort on key initiatives across payments, wealth management and capital markets. Within payments, revenues have increased by $4,000,000 in the 3rd quarter and have increased by $6,000,000 year over year.

Speaker 3

Commercial payments revenues including treasury management fees have grown strongly increasing by 8% from the prior year. Debit card revenue grew by 3% year over year reflecting performance higher than industry averages yet clearly impacted by the relatively slower levels of consumer spending growth we are seeing economy wide. Other card based revenues continue to grow year over year supported by consumer credit card spending trends. The addition of merchant acquiring in house capabilities will further support our overall payments revenue growth as we enter the Q4 and carry into 2025. As Steve noted earlier, we see this initiative adding approximately 1 percentage point to overall fee revenue growth next year.

Speaker 3

Within Wealth Management, revenue growth was outstanding, increasing 18% from the prior year. Advisory relationships have increased by 7% year over year and assets under management have increased 22% on a year over year basis. These results benefited from sustained positive net asset flows. Within capital markets, we saw exceptionally strong revenue growth increasing by $26,000,000 or 50% from the prior year to $78,000,000 These results were driven by commercial banking related capital markets revenues, which are accelerating as we have previously guided as a result of higher commercial loan production. As we look out into Q4, we expect to post another quarter of sequential growth in capital markets driven by continued underlying core banking related services and a robust advisory pipeline.

Speaker 3

We expect this positive momentum to carry into 2025. Moving on to Slide 15 on expenses. GAAP non interest expense increased by $13,000,000 and underlying core expenses also increased by $13,000,000 During the quarter, we incurred $13,000,000 of expenses related to efficiency programs, which will benefit our 2025 expense outlook and allow us to reinvest savings into key revenue producing initiatives. Additionally, this was partially offset by a $7,000,000 benefit from the FDIC special assessment. Net notable items for the quarter totaled $6,000,000 Excluding these items, core expenses came in slightly better than our expectations for the quarter at $1,124,000,000 The increase in core expenses quarter over quarter was primarily driven by personnel expenses due to higher salaries and benefit costs.

Speaker 3

We also saw $3,000,000 of higher expenses related to merchant acquiring as we brought that business in house and launched our services in October. We continue to forecast approximately 4.5% core expense growth for the full year. Slide 16 recaps our capital position. Common Equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio inclusive of AOCI was 8.9% and has grown 90 basis points from a year ago.

Speaker 3

Our capital management strategy remains focused on driving capital ratios higher while maintaining our top priority to fund high return loan growth. We intend to drive adjusted CET1 inclusive of AOCI into our operating range of 9% to 10%. On Slide 17, credit quality is coming in as we expected and continues to perform very well. Net charge offs were 30 basis points in Q3 relatively stable over the past 4 quarters. Allowance for credit losses at 1.93% declined by 2 basis points from the prior quarter and reflects both modestly improved economic outlook as well as an increased loan portfolio.

Speaker 3

On Slide 18, the criticized asset ratio decreased by 9% from the prior quarter to 4.09%. The non performing asset ratio declined by 1 basis point to 62 basis points. Turning to Slide 19. Our outlook for the full year remains unchanged from our prior guidance. Our expectations for the 4th quarter include accelerating loan growth at approximately 4% to 5% on a year over year basis.

Speaker 3

Deposit growth is expected to increase between 4% 5% on a year over year basis. We see full year net interest income unchanged from our prior guidance range. The 4th quarter level is expected to be flat to up 1% on a year over year basis and then resume growth in the first half of twenty twenty five and accelerating in the second half. Core fee revenues adjusted for the swaptions and CRT items are expected to grow at approximately 8% to 9% year over year in the Q4. Core expenses are well managed and tracking to our full year outlook.

Speaker 3

For the Q4, we expect growth of approximately 3% year over year subject to some variability given revenue driven compensation levels as well as expenses related to the in sourcing of our merchant acquiring business, which brings with it direct offsetting fee revenues. This is consistent with our previous commentary to exit the year at a low single digit year over year expense growth rate. Credit is performing well, aligned with our expectations and net charge offs are projected to be relatively similar to Q3. Our tax rate for the Q4 is likely to be between 18% 19%. With that, we'll conclude our prepared remarks and move over to Q and A.

Speaker 3

Tim, over to you.

Speaker 1

Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

Operator

Thank you. At this time, we'll be conducting a question and answer Thank you. And our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Speaker 4

Hey, good morning.

Speaker 5

Good morning, Manan.

Speaker 4

Good morning. So the guidance for 4Q NII, I think implies that NII should be flat to slightly down versus 3Q. Can you talk about what's driving that? Is that just a timing difference between those floating rate asset yields coming down and deposit costs coming down?

Speaker 6

Thanks, Manav. This is Zach. I'll take that one. And the short answer to the rest is yes. Just a short timing difference between the really powerful and very effective actions we've seen on reducing deposit costs, which you saw some of the trends we illustrated in the 3rd quarter.

Speaker 6

Those will continue into the 4th quarter, just not fully offsetting on a short term basis the reductions in variable yields. I think we'll exit Q4 having a positive run rate benefit from deposit costs relative to asset yields with the early part of the quarter, assuming again 2 more rate cuts, which is our forecast here, will likely be a little lower quarter to quarter.

Speaker 4

Got it. And can you share more color on the deposit growth there? It looks like you continue to grow deposits faster than loans this quarter. Is that mostly coming from new account growth? And I guess the question there is why not pay down some of the higher cost CDs to help NII and have deposits grow a little bit slower than loans given that you prefunded a lot of the loan growth in the first half of the year?

Speaker 6

Yes. It's a terrific question, Manav. That is effectively the plan. We're really pleased to see how much deposit growth we've seen throughout the course of this year, obviously, very significantly faster than the industry average overall. And that really puts us in a pretty strong position now with having brought down loan to deposit ratio and just given how strong that deposit gathering has been to now turn and drive a down beta and begin to decelerate deposit growth even as loan growth is accelerating.

Speaker 6

So if you look at the guidance we've given for deposits into the Q4, I would expect the balances to be relatively flat actually quarter to quarter even as they still grow year on year. And that's really an indication that we're doing exactly what you just said, leveraging that position to really drive funding costs lower.

Speaker 4

Got it. Thank you.

Operator

Our next question is from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Speaker 7

Hey, good morning.

Speaker 6

Good morning, Abraham.

Speaker 7

Two things. 1, I guess, Zach, just wanted to follow-up. I think you mentioned NII, I guess, you have the guidance for Q4. And then did you mean to say that the growth accelerate from the 4Q versus 3Q level as we think about first half twenty twenty five and then get even faster through the course of twenty twenty five? If you could just clarify that.

Speaker 7

And with that, what's the sensitivity to rate cuts, right? Like we had very strong retail sales, so the market's actively recalibrating what the Fed may or may not do. Just talk to us whether getting 3 to 4 cuts versus not getting those cuts means much in terms of your NII outlook?

Speaker 6

Yes. Great question, T. V. I appreciate the chance to unpack it and clarify a bit. So, Anil, our general expectations for NIM are to be a few basis points lower into the Q4, really driven by what I was talking about from Anand's question earlier, just a short timing impact before which before accelerating beta starts to fully offset and more than offset the variable impacts on variable loans.

Speaker 6

I will note as well that one of the major benefits we'll have to NIM here is our hedging program. And just for the facts, we had around 12 basis points of hedge dragging in the second quarter sorry, in the third quarter. That's going to reduce if you look at the forward yield curve down to 7 basis points in Q4 and flip over the course of 2025 to a 5 basis point benefit by the end of 2025. So beta accelerating and the hedge drag continually reducing and then beginning to be a hedge benefit as you go throughout the course of next year really are the drivers of why we expect to see sustained NIM expansion from the Q4 level into Q1, into Q2 and Q3 and then continuing on from there. So expect to see a nice upward drift in NIM from the Q4 level throughout the course of 2025.

Speaker 6

And when you couple that with the really robust loan growth we're driving, that will be what drives NII higher over the course of 2025. We expect, as I noted in my prepared remarks, record NII dollars in 2025, really driven by those two factors.

Speaker 7

Understood. And

Speaker 6

then just maybe I'll expand then on your question on sensitivities. So I think your point is very well noted. It's a pretty dynamic environment for sure. And while our underlying forecast assumes a couple more rate cuts this quarter and then 5 into next year, you could very well not see those as you noted. I think in the short term for us, if you saw less rate cuts, you'd see an even better NIM performance and an even better NII dollar performance.

Speaker 6

Of course, as you know well, what would also matter a lot is the reason why you're not seeing those rate reductions and what that would imply about customer and market beliefs about where rates are going. And so for the longer term that would be uncertain impacts, but in the short term it would be universally positive for us to have less rate cuts. If there's more, I think again it kind of matters why. I do think for example, EV earlier this year when we saw market expectations for rate reductions really accelerate a lot, that was very helpful to drive the actions around down beta. And so if you did see more rate reductions, while it might produce a little bit of short term headwinds, over the longer term, it might actually be even better for down rate deposit pricing.

Speaker 6

And so again, sort of a little uncertain over the short over the long term there if rates are even faster down.

Speaker 7

That's helpful. And I guess just one thing you talked earlier about traction in Carolinas, just how loan growth was evolving.

Speaker 8

Talk to

Speaker 7

us in terms of deposit growth. You did hire sort of a big team on the mortgage side. We've seen mortgage rates pull back. But either that team or just the overall deposit gathering strategy beyond promotional rates, where do you see deposit growth coming from?

Speaker 6

Yes. I mean, what we've seen with deposit performance throughout the year is consumer has been really, really strong. But over the course of the last several quarters, commercial now starting to really catch up. And I think that's driven both by our core commercial business, but also by some of the new verticals and new markets. The mortgage service vertical in particular has been doing really well, driving a couple of $1,000,000,000 of incremental deposits in the Q3.

Speaker 6

And as I think we've noted before that, that could well continue to grow longer term here as well. So it's commercial is now beginning to accelerate. And I think as we have an outlook for 'twenty five, I would expect we're generally expecting continued deposit growth with the mix being slightly more commercial than consumer as we go into next year.

Operator

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Speaker 9

Hey, thanks. Good morning, guys.

Speaker 6

Good morning, Jon.

Speaker 9

A couple one clarification, I think maybe a simple question, but you're saying 4th quarter NII around $1,330,000,000 $340,000,000 something like that. Am I reading that right?

Speaker 6

You're expecting between $15,000,000 to $25,000,000 lower sequentially, John. That will be around flat to up 1% on a year over year basis. Again, assuming not only 50 cuttages had, but another 225s here in the last few months of this year.

Speaker 9

Okay. Okay, that's helpful. Thank you for that. And then, kind of a simple question, funny question, but on Slide 10, I kind of want to joke about the scaling of that, but the Q4 25 bar chart implies higher NII. Is there odd question, is there any scaling to that, Zach?

Speaker 9

Or what kind of an acceleration do you expect in NII growth throughout the year?

Speaker 6

I'm expecting pretty steady NII dollar growth from Q1 to Q2, from Q2 to Q3 and continuing on. John, I think the kind of the path of NIM, obviously, starting out to get into a bit of overly level of precision at this point given all the uncertainties. But generally speaking, I'm expecting to see nice sustained NIM expansion in Q1, Q2, Q3 and a bit topping out into Q4, but we'll see where the great environment is at that point. And the dollars really be pretty steady growth throughout the year as lending sustains at a fairly solid level. It's probably the best way I can answer your question.

Speaker 9

Yes. Okay, good. If I can squeeze one more and I apologize for doing this, but the merchant acquiring, you're saying 1% growth to overall fee revenues. Are you saying that could be a $200,000,000 business? Is

Speaker 6

that too much or am I correct? Currently, our yes, a little bit off. We make roughly $25,000,000 on a run rate annual basis for merchant acquiring in the old outsourced model that we have. As we in source that business, we're thinking next year can be filled up 50 mil in terms of overall revenue, which is that's an extra $25,000,000 sort of about 1% of the overall fee revenue base as you go into next year.

Speaker 9

Yes. Okay. All right. Thank you for clarifying.

Speaker 6

Yes. Good questions.

Operator

Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.

Speaker 6

Good morning, Erica.

Operator

Erica, perhaps your line may be muted. You're live for questions.

Speaker 8

Can you hear me?

Speaker 6

Yes, we can hear you now.

Speaker 7

Yes, we

Speaker 8

can hear you now. Sorry about that. So Zach, as you can imagine, everybody is asking about the blank box on 4Q 25 for Slide 10. So maybe I'll ask it this way. So consensus wants to fill that box that would imply 8% year over year growth from your implied Q4 up 8% quarter over quarter, are they in the right ballpark?

Speaker 8

Yes. So I think that's a good point. Okay. And then just up 8% quarter over quarter, are they in the right ballpark as we think about your loan growth momentum and the dynamics of your balance sheet?

Speaker 6

Well, I'm not going to give that level of guidance precision at this point in the year. As you know, we will give guidance as we get into the early part of next year. But I don't think that's directionally wrong, frankly. I think we're expecting to see NIMs rise throughout the course of 2025. I mentioned earlier, I see NIM above 3% in the second half of next year.

Speaker 6

If you compare that to where we'll be this year, that will be a nice NIM expansion off of our forecast for Q4. So that will drive some year over year growth. And then our current run rate on loan growth is around 6% on an annualized pace right now. And there's nothing that indicates we will not be able to sustain that pace into next year. In fact, the Q4 looks outstanding in terms of loan growth and the momentum we've got across the business.

Speaker 6

And so those are relatively good underlying drivers to get to the number you're talking about without being overly declared on guidance at this point.

Speaker 8

That's helpful. Thank you. And on the expense run rate, I think, Zach, what you and Steve have been talking about in terms of investments really showed through with regards to your 3% year over year Q4 guide for Q4 relative to the run rate for this year and we're seeing it in the loan growth. As we think about next year, with the caveat that Huntington under this management team and Board is constantly investing, should we expect more of a harvest year, so to speak, in that perhaps that 4th quarter run rate year over year is more sustainable rather than the 5%, 5.5%?

Speaker 6

Yes. Great question. In the area of expenses, it's something we're incredibly rigorously focused on. And this year is playing out pretty much exactly like we expected, hitting the roughly 4.5% year over year growth, decelerating throughout the year, as you noted. And really, Erica is staying focused on the model we've got, driving efficiencies and baseline expenses.

Speaker 6

You saw us take another series of actions in the Q3 and those are continuing on. It's a fairly continual process of driving our engineering to enable us to really drive the offensive expense categories that are investment related, technology development, marketing, additions of people to go and drive some of these new great revenue producing initiatives. The plan for 2025 is the same as we've had before, drive for positive operating leverage. I do expect to a little bit to the point of your last question to have a pretty solid revenue growth trajectory. And so I don't intend to we collectively don't intend to be in harvest mode.

Speaker 6

We want to keep driving for growth, but certainly to drive very solid improvement in positive operating leverage and efficiency ratio and then just to sustain that as we go forward.

Operator

Our next question is from the line of Matt O'Connor with Deutsche Bank.

Speaker 5

Question on the revenues came in a decent amount better than you expected with the intra quarter guide. I assume a lot of that swing is the capital markets and maybe the loan sale. But just anything else that surprised you that you'd want to call out? I mean, all the categories actually did pretty well. So I guess I'm just wondering

Speaker 6

if it was kind

Speaker 5

of better than what you thought a month ago? Thanks.

Speaker 6

Yes. Great question, Matt. And it was primarily Capital Markets that you noted in the basis of your question. So we were expecting to see a pretty solid Q3 for Capital Markets, but it beat our expectations even better than that. Overall, really, really pleased with the execution, sustained level of performance we're seeing in the 3 key areas of focus.

Speaker 6

12% year over year growth in fees is pretty outstanding from our perspective. The outlook for Q4 is likewise pretty solid, particularly in Capital Markets. I think we'll see another really good quarter of sequential growth in the cap markets. Wealth continue to drive a good underlying household acquisition and net flows and then payments really chugging along here, particularly with the

Speaker 10

addition of merchant acquiring, should

Speaker 6

be a nice lift on the tailwind to grow.

Speaker 5

Okay. And then on the credit risk transfer, the CRTs, as you call it, now that you've got you're approaching your targeted capital level, even including OCI and you've got all the funding and all those positives, is that something that you're looking to do less of going forward or unwind them?

Speaker 6

Yes, great question. On the plan to grow capital, feel really good about how that's going. And as you've noted a number of times, the primary and most significant driver of our plan to continue to drive capital hires is just core organic earnings and strong return on capital. We look at these CRT transactions as really tactical, as opportunistic. They're kind of an interesting innovation marketplace for sure that offer great low return on capital for certain asset classes.

Speaker 6

Just look back to the transaction we did in the 2nd quarter, we unlocked 17 basis points of capital for less than 3% cost of capital, just $7,000,000 plus transaction costs. So very, very efficient. So it's possible we'll be opportunistic in the future around these, but they're really we see them in that light, opportunistic. And the core is really the underlying return on capital and organic earnings.

Speaker 5

Got it. Okay. Thank you.

Speaker 6

Thank you.

Operator

Our next question is from the line of Sean Sarhan with Evercore ISI.

Speaker 11

I was hoping you could address trends and strategy in the auto business. Production stepped up again late quarter and 3Q. Can you talk about the growth outlook there a little bit? And then maybe shifting to credit, there was a big update mid quarter from an auto peer and you saw a little bit of a step up in these Qs this quarter. Can you address expected credit trends given shifting auto values?

Speaker 11

Thanks.

Speaker 6

Yes. Sean, thanks for the question. This is Zach. I'll take the first part and then Brendan will tack off with the second part around the bracket falls. So really, really pleased actually with what we're seeing in the auto loan production area.

Speaker 6

Auto for us is a terrific asset to lean into at times like this. One of the general expectation for rates is to be reducing a nice fixed asset class, got about a 2 year duration. Remember, this is prime and super prime credit quality, so very, very solid underlying returns and also incredibly efficient business for us. It's a 10% efficiency ratio business for us that is very, very optimizable. We can put in pricing in the market on Friday, see the impacts of it over the weekend, dial it back in again the next Tuesday as we go into the next week.

Speaker 6

And so really, really optimizable and precision return calibration for us here. So we like this one. I think the production levels for the Q4 look to be around the same as the Q3 here. So I think we've got to get a nice run rate at this point and then we'll see where it goes out into the course of next year. But right now, nice fixed asset that we're getting very significant fixed asset repricing benefits coming through into the NIM.

Speaker 6

Maybe Brandon over to you on credit. Sure. Sean, this

Speaker 12

is Brendan. And given our history in this industry, we have the ability to utilize our custom scorecard to really drive the customer selection that Zach was referencing. And that continues to be a strength for us. We've seen late stage delinquency and charge offs have remained right within our historical levels. So we're not seeing broad deterioration at all here.

Speaker 12

And frankly, with our deep industry expertise and we're traditionally lower than the peer set when it comes to charge offs or delinquencies and that trend continues this quarter. So we feel real confident in this book.

Speaker 10

Don, we've been this is Steve. We've been very disciplined. We've got 15 years of quarterly track record here. It's an area of continued focus and discipline as well as we

Speaker 6

refined the bottle on a

Speaker 10

number of times during the course of that period of time. So we like what we're seeing. We're very confident. And obviously, with the disciplines we have, super prime prime, we're not going to see what you alluded to from another

Speaker 11

institution. Got it. Very helpful. Thank you. And then Zach, shifting over to the hedge program slide, it's always helpful.

Speaker 11

I noticed you received fixed balance in the back half of 25 came down a bit this quarter versus last. Can you update us on any adjustments made there in the quarter? And then maybe highlight any future adjustments you're thinking about?

Speaker 6

Thanks for bringing that question up, John. So what we tried to illustrate on that slide is really the continued dynamic management of asset sensitivity really bringing down asset sensitivity a lot, both a third reduction in sensitivity just in the 3rd quarter alone, get to 50% reduction from Q2 by the end of this year and then to 60% by the middle of next year. And one of the things we try to highlight all the time in this is we're very dynamic. So we're continually looking at the most efficient way to really do those two objectives of protecting capital and maximizing and stabilizing NIM. So we'll always make adjustments here as we deem most efficient.

Speaker 6

An example of that, we just did another $1,000,000,000 of forward starting receivers just in the early part of this quarter that are really starting out into the second half of twenty twenty five that will just continue to drive asset sensitivity lower at the time we really want it. So we're always doing this. Really primarily at this point, the game plan vis a vis asset sensitivity is gradually allow the pay fixed swaptions to reduce and to expire, Put on more forward starting receivers when we see nice opportunities in the market to do that. Gradually lengthen the duration in our U. S.

Speaker 6

Treasury securities portfolio and really optimize the kind of funding mix for lower structurally fixed funding, more structurally variable funding and optimize lower levels of fed cash. And so those are really the components that drive the overall reduction in asset sensitivity.

Speaker 11

Perfect. Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the call back to Mr. Steinauer for closing remarks.

Speaker 10

Thank you for joining us today. In closing, we delivered exceptional results for the Q3, highlighted by the successful execution of organic growth initiatives. Net interest income expanded, fee revenues grew strongly, expenses were well managed and credit remained stable. Our strategy is working well and our investments in the franchise are delivering returns. We remain in an attractive competitive position and we continue to seize opportunities to add talented bankers across our businesses.

Speaker 10

Collectively, the Board executives and our colleagues are a top 10 shareholder, so we have strong, strong alignment to deliver sustained value creation for our shareholders. As a reminder, we have an Investor Day scheduled in the New Year on February 6, and you're invited to that. And finally, thank you to all our Huntington colleagues for driving these outstanding results. Thank you very much for joining us today. Have a great day.

Operator

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 Q3 2024
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