Huntington Bancshares Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2024

There are 12 speakers on the call.

Operator

Greetings, and welcome to Huntington Banc 2023 4th Quarter Earnings Review. At this time, all participants are in a listen only mode. A question and answer session As a reminder, this conference is being recorded. I would now like to turn the conference over to Tim Stavros, Director of Investor Relations. 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.hinington.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 Steinauer, 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're pleased to announce our Q4 results, which Zach will detail later. These results are again supported by our 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.

Speaker 2

Now on to Slide 4. There are 5 key messages we want to leave you with today. 1st, We are leveraging our position of strength and executing on our strategic growth initiatives. We are well positioned to benefit during times like these. We managed our capital levels to enable us to accelerate initiatives during 2023 and support continued growth.

Speaker 2

We added key specialty verticals in commercial banking and expanded into the Carolinas. 2nd, We outperformed on both deposits and loans throughout the year. Our colleagues are acquiring new customers and deepening our existing customer relationships. Importantly, we delivered this growth while effectively managing our deposit beta. 3rd, we expect to modestly expand net interest income as we manage the challenges of the interest rate cycle and are driving increased fee revenues.

Speaker 2

4th, we are rigorously managing credit across our portfolios, consistent with our aggregate moderate to low risk appetite. Credit trends are normalizing as expected and we continue to believe we will outperform the industry on credit through the cycle. Finally, we remain intently focused on our core strategies. Huntington remained resilient through the events of 2023, Emerging as one of the strongest regional banks, we maintained our disciplined execution and we expect to grow earnings over the course of 2024 and continuing into 2025 beyond. I will move us on to Slide 5 to recap our performance in 2023.

Speaker 2

Huntington delivered solid results over the course of the year against a challenging backdrop. While the banking sector faced headwinds early in the year, Huntington emerged as a secular winner, gaining new customers, adding over $3,000,000,000 of deposit growth and further bolstering our capital. We also increased loans by $2,500,000,000 for the full year or 2%, while driving capital ratios higher. We expect the pace of loan growth to accelerate in 2024. We added to our revenue base, primarily as net interest income increased by 3.3% for the full year.

Speaker 2

We maintained our leadership in customer satisfaction and digital capabilities, Having again been awarded the number one ranking by J. D. Power for both categories, we remained focused on executing our strategies, including growing consumer primary bank relationships by 3%. Additionally, we completed the realignment of business segments. We also delivered on efficiency initiatives, including Operation Accelerate, the voluntary retirement program, staffing efficiencies, business process offshoring and branch and other real estate consolidations.

Speaker 2

We were nimble and opportunistic, adding key talent this past year with the addition of 3 new specialty commercial banking verticals. We also expanded our commercial and regional bank into the Carolinas, adding experienced teams in these attractive and high growth markets. Additionally, we further strengthened our balance sheet and drove capital ratios higher over the course of the year. We are getting ahead of proposed industry requirements. And finally, credit was managed exceptionally well with full year net charge offs of 23 basis points.

Speaker 2

Moving to Slide 6. Looking ahead to 2024, we have a clear set of objectives. We will leverage our position of strength to increase growth of both deposits and loans. This outlook will result in accelerated revenue growth and is further bolstered by fee opportunities. This posture coupled with our dynamic balance sheet management and hedging programs is expected to benefit the revenue and profitability outlook for 2024 and further expand into 2025 and beyond.

Speaker 2

This aligns with the improving macro backdrop, the higher probability of continued GDP growth and the avoidance of a hard landing. While we deliver this accelerated growth, we will continue to maintain our aggregate moderate to low risk appetite. Zach,

Speaker 3

over to you

Speaker 2

to provide more detail on our financial performance. Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our 4th quarter results. We reported GAAP earnings per common share of $0.15 and adjusted EPS of $0.27 The quarter included $226,000,000 of notable items, primarily related to the FDIC special assessment, which impacted EPS by $0.12 per common share. Additionally, the termination of the pay fixed swaption hedging program impacted pre tax income by $74,000,000 or $0.04 per share.

Speaker 2

Return on tangible common equity or ROTCE came in at 8.4% for the quarter. Adjusted for notable items, ROTCE was 15.1%. Average deposits continued their trend of growth into the 4th quarter increasing by $1,500,000,000 or 1%. Cumulative deposit beta totaled 41% through year end. Loan balances increased by $445,000,000 As we continue to optimize the pace of loan growth to drive the highest return on capital.

Speaker 2

Credit quality remains strong. The trend is normalizing consistent with our expectations and net charge offs totaled 31 basis points. Allowance for credit losses ended the quarter at 1.97%. Turning to Slide 8. As I noted, Average loan balances increased quarter over quarter and were higher by 2% year over year.

Speaker 2

We expect the pace of future loan growth to accelerate over the course of 2024. Total commercial loans increased by $125,000,000 for the quarter and included distribution finance, which increased by $225,000,000 benefited by normal seasonality as manufacturer shipments increased due to inventory build of winter products, auto floor plan increased by $359,000,000 and CRE balances which declined by $361,000,000 including the impact of payoffs and normal amortization And all other commercial categories net decreased as we continue to drive optimization toward the highest returns. In consumer, growth was led by residential mortgage, which increased by $295,000,000 and RV Marine, which increased by $121,000,000 while auto loan balances declined for the quarter. Turning to slide 9, As noted, we continued to gather deposits consistently in the 4th quarter. Average deposits increased by $1,500,000,000 or 1% from the prior quarter.

Speaker 2

Turning to slide 10, growth was maintained each month throughout the Q4 continuing the recent trend. Total cumulative deposit beta ended the year at 41% in line with our expectations and reflecting the decelerating rate of change we would expect at this point in the rate cycle. As we've noted in the past, where beta ultimately tops out will be a function of the end game for the rate cycle in terms of the level and timing of the peak and the duration of any extended pause before a decrease. Given market expectations for rate cuts to start sometime in 2024, our current outlook for deposit beta remains unchanged, trending a few percentage points higher and then beginning to revert and fall if and when we see rate cuts from the Fed. When interest rate cuts commence, We expect to manage betas on the way down with the same discipline as we have during the increasing rate cycle.

Speaker 2

Turning to slide 11, Non interest bearing mix shift continues to track closely to our forecast with deceleration of sequential changes. The non interest bearing percentage decreased by 80 basis points from the 3rd quarter and we continue to expect this mix shift to moderate and stabilized during 2024. On to slide 12. For the quarter, net interest income decreased by $52,000,000 or 3.8 percent to $1,327,000,000 Net interest margin declined sequentially to 3.07 percent in line with our forecast. Cumulatively over the cycle, we have benefited from our asset sensitivity and the expansion of margins with net interest revenues growing at an 8% CAGR over the past 2 years.

Speaker 2

Reconciling the change in NIM from Q3, we saw a decrease of 13 basis points. This was primarily due to lower spread net of free funds, which accounted for 9 basis points, along with a 2 basis point negative impact from lower FHLB stock dividends and a 2 basis point reduction from hedging. Turning to slide 13, let me share a few added thoughts around the fixed rate loan repricing opportunity that will benefit us over the moderate term. The construct of our balance sheet is approximately half fully variable rate, 10% in indirect auto, which is a shorter approximately 2 year average life and 10% in ARMs with a 4 year average life. The remainder of approximately 30% is longer average life fixed rate.

Speaker 2

We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle. Even as the forward curve forecasts lower short term rates, Many of our fixed rate loan portfolios retain substantial upside repricing opportunity for some time to come. We forecast approximately $13,000,000,000 to $15,000,000,000 of fixed rate loan repricing opportunity in 2024, with an estimated yield benefit of approximately 3.50 basis points. Slide 14 provides the drivers of our spread revenue growth. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios.

Speaker 2

The basis of our planning and guidance continues to be a central set of those scenarios. It is bounded on the lower end by a scenario which includes 5 rate cuts in 2024. The higher scenario assumes rates stay higher for longer and tracks closely with the Fed's dot plot from year end. This scenario assumes 3 cuts in 2024. We continue to be focused on managing net interest margin in a tight corridor.

Speaker 2

Should the lower rate scenario play out and we see rate cuts as early as March, That will likely result in a margin over the course of the year within a range near the level we saw in the 4th quarter. This would equate to a net interest margin between 3% and 3.1% for each quarter of 2024. If the higher for longer scenario comes to pass, we expect the margin to expand and at a level that is up to 10 basis points above that. As we saw in December, the outlook for longer term interest rates also moved lower significantly. There were a number of benefits from this lower market rate outlook.

Speaker 2

First, it resulted in higher capital levels given AOCI accretion, which supports our accelerated loan growth outlook now. 2nd, it provides for easing deposit competition over time. 3rd, it provides credit support for borrowers with the potential for locking in lower long term rates. However, the rate outlook is incrementally more challenging for full year spread revenue than the levels we had seen underlying our guidance in December. Net of these items, including the forecasted pace of loan growth, We now expect net interest income on a dollar basis to trough in the Q1 before expanding sequentially from that level over the course of the year.

Speaker 2

Turning to slide 15, our contingent and available liquidity continues to be robust at $93,000,000,000 and has grown quarter over quarter. At quarter end, we continue to benefit from a diverse and highly granular deposit base with 70% insured deposits. Our pool of available liquidity represented 206% of total uninsured deposits appear leading coverage. Turning to slide 16, our level of cash and securities at year end increased as we've begun to reinvest portfolio cash flows during the Q4. This investment strategy is consistent with our approach to continue to manage the unhedged duration of the portfolio lower over time.

Speaker 2

We have reduced overall hedge duration of the portfolio from 4.1 years to 3.7 years over the past 18 months. Turning to slide 17, we've updated our forecast for the recapture of 26% of total AOCI from the peak level at September 30. Using market rates at year end, We would recapture an estimated incremental 44 percent of AOCI over the next 3 years. Turning to slide 18, We continued to be dynamic in positioning our hedging program. As the rate outlooks changed over the course of the Q4, We focused our objective incrementally on the protection of NIM in down rate scenarios and actively reduced instruments that were intended to protect capital in upgrade scenarios.

Speaker 2

As we announced in late December, we terminated the pay fixed swaptions program As our assessment of the probability for substantial up rate moves decreased. Over the course of Q2 through Q4, This program worked as intended, providing significant protection against possible tail risk up rate moves with a modest overall cost for that insurance. Additionally, during the quarter, we added to our down rate NIM protection strategies, adding $2,100,000,000 of forward starting receive fixed swaps and adding $1,000,000,000 of floor spreads. We exited $2,000,000,000 of callers which were near expiration. Our objective with respect to our down rate hedging activities remains unchanged to support the management of net interest margin in as tighter range as possible.

Speaker 2

Moving on to slide 19. Our fee growth strategies remain centered on 3 key areas, Capital Markets, Payments and Wealth Management. Note this quarter in our earnings materials, we've updated the presentation of our non interest income categories In order to more clearly highlight our strategic areas of focus and more closely aligned to the way we manage the business, Slide 35 in the appendix provides further detail on the components of each line item. These three key focus areas for fee growth Collectively represents 63% of total non interest income. We are seeing positive underlying growth in each of these areas.

Speaker 2

In Capital Markets, we're pleased that revenues expanded sequentially. Both advisory and core bank capital market products grew in the quarter. Our outlook is constructive for 2024 and we expect capital markets to remain a key driver for fee revenue growth over the medium term. Payments and cash management revenue includes debit and credit card revenues along with treasury management and merchant processing. Our payments opportunity is substantial, reflecting 31% of total fee revenues today with the potential for significant growth over time.

Speaker 2

Wealth and Asset Management revenue has benefited from the realignment earlier this year, which brought together Our Private Bank and Retail Advisory Businesses Under One Umbrella. Our advisory penetration rate of the customer base continues to increase as Wealth Advisory households have grown 11% year over year and assets under management are up 16% from a year ago. Moving on to slide 20. On an overall level, GAAP non interest income decreased $104,000,000 to $405,000,000 for the 4th quarter. Excluding the mark to market on the pay fixed swaptions and the CRT premium, Fees increased by $5,000,000 quarter over quarter.

Speaker 2

Moving on to Slide 21 on expenses. GAAP non interest expense increased by $258,000,000 and underlying core expenses increased by $47,000,000 As I mentioned, We incurred $226,000,000 of notable item expenses related primarily to the FDIC Deposit Insurance Fund Special Assessment during the quarter. It also included the last portion of costs related to our staffing efficiency program and corporate real estate consolidations. Excluding these items, core expense included higher personnel and professional services driven by seasonally higher benefits expense, incentives as well as consulting expenses. The level of expenses we saw in the 4th quarter is largely consistent with the dollar amount we expect quarterly over the course of 2024.

Speaker 2

This is inclusive of the investments we've discussed previously, as well as sustained efficiencies we are driving across the company. Slide 22 recaps our capital position. Reported common equity Tier 1 increased to 10.3% and has increased sequentially for 5 quarters. Our adjusted CET1 ratio inclusive of AOCI was 8.6%. This metric increased 58 basis points compared to the prior quarter, driven by adjusted earnings net of dividends as well as the benefit from the credit risk transfer transaction we announced in December, which more than offset the impact from the FDIC special assessment.

Speaker 2

We also saw significant benefit from AOCI recapture Given the move in rates during the quarter, 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 23, credit quality continues to perform very well and with normalization of metrics consistent with our expectations. Net charge offs were 31 basis points for the quarter. This was higher than Q3 by 7 basis points and resulted in full year net charge offs of 23 basis points. This outcome was aligned with our outlook for full year net charge offs between 20 30 basis points at the low end of our target through the cycle range for net charge offs of 25 to 45 basis points.

Speaker 2

Gross charge offs in the 4th quarter were relatively flat with the overall change in net charge offs largely result of lower recoveries. Given ongoing normalization, Non performing assets increased from the previous quarter, while remaining below the prior 2021 level. The criticized asset ratio increased quarter over quarter with risk rating changes within commercial real estate being the largest component. Allowance for credit losses was higher by 1 basis point to 1.97% of total loans and our ACL coverage ratio continues to be among the top quartile in the peer group. Let's turn to our outlook for 2024.

Speaker 2

As we mentioned, we expect to drive accelerated loan growth between 3% 5% for the full year. Deposits are likewise expected to continue their solid trend of growth between 2% 4%. As a result of the loan growth and margin outlook I shared earlier, net interest income for the full year is expected to range between down 2% to up 2%. The pace of loan growth coupled with the rate scenario we see actually play out will drive the range of spread revenue. If the higher for longer rate scenario plays out and loan growth tracks to the top end of our range, we expect an interest income to grow by approximately 2%.

Speaker 2

If the lower scenario comes to fruition and loan growth tracks to the lower end of our growth range, we could see spread revenue declining 2 percentage points. In both scenarios, I expect net interest income to trough in the Q1 before expanding throughout 2024 from that level. Non interest income on a core underlying basis is expected to increase between 5% 7%. The baseline of core excludes notable items, the mark to market impact from the Payfix swaption program as well as CRT impacts. Fee revenue growth is expected to be driven primarily by Capital Markets, Payments and Wealth Management.

Speaker 2

Core expenses are expected to increase by 4.5%. This level reflects the finalization of our budget and includes the additional loan growth we discussed earlier, which will have some incremental compensation expense tied to production. Expenses could fluctuate depending on the level of revenue driven compensation, primarily associated with our fee based revenues including capital markets. The tax rate is expected to be approximately 19% for the full year. We expect net charge offs for the full year to be between 25 With that, we'll conclude our prepared remarks and move to questions and answers.

Speaker 2

Tim, over to you.

Speaker 1

Thanks, Zach. Operator, we will now take questions.

Speaker 4

Thank you.

Operator

Our first question today is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Speaker 5

Hi, good morning. Good morning. I wanted to start off on the expense guide change. I know it's a small change from 4% to 4.5%, but it is higher than some of your peers are guiding to for 2024. Just hoping you could elaborate more on what's going into that.

Speaker 5

And also, if there is a similar flex On the expense side as there is on the revenue, so for instance, if you get to your down 2% NII number with more rate cuts, does that drive a little bit of flex on the expense side as well?

Speaker 3

Great question, Manav. This is Zach. I'll take that. The guidance that we've given back in October and in December was really primarily designed to be an early view for you, so you can get And inside to some of the key decisions we were making and for us to really be able to discuss that in detail, that was the approximate 4% we discussed before. The finalization of our budget reflects the additional loan growth that we've now added to the plan and associated fee revenues as well.

Speaker 3

What represents the difference up to 4.5%. Fugitive said it's about $5,000,000 a quarter, so relatively small. I think you are any of the underlying drivers of that are unchanged from what we have discussed before. We'll continue to drive significant efficiencies in the core Based on expenses with a number of programs, we'll continue to invest in our strategic growth initiatives. We'll execute on the incremental build of capabilities and automation and data to get ahead of coming regulations and we'll execute on the news really attractive commercial Growth opportunities we've discussed before, all of that's included in that number and no change to our expectation as well reducing that curve of 3 as we go into 2024 2025, excuse me, back to more normalized levels.

Speaker 3

As it relates to your question in terms of the kind of marginal sensitivity of it. Certainly, that would be just under that. I think the expense going guide is generally calibrated to sort of the middle of the ranges we've got growth in revenues and so some potential upside of expenses if all of the revenues hit the high end Likewise, substantial opportunity if the revenues were at the lower average.

Speaker 5

Great. Thank you. And my next question was On the deposit franchise, you have a pretty strong core consumer deposit franchise. And some of your peers have highlighted that there's still some lagged upward repricing in deposits there. So can you talk about how you expect those deposits to behave over the next few quarters And then as the Fed begins to cut rates?

Speaker 3

Yes. This is Zach. I'll take that one again. What we've been seeing in the marketplace Broadly with respect to deposit costs and deposit beta, both across both consumer and commercial is the as we thought you'd expect a of the sequential changes and very much for us trending highly aligned to our expectations. As well, I will tell you that we are beginning to see in the marketplace a fairly constructive initial signs of Firms preparing for what will likely be soon a downgrade environment with a shortening, for example, time deposit terms, The change of promotional terms around money market and select testing of different price for unique segments and unique geographies, all of which is what you'd expect to pre stage will also be a series of down beta moves.

Speaker 3

With respect to your specific question on consumer and sort of will that trend, I think the answer is yes. What we have been saying a lot is that deposit costs in beta will continue to trend at a decelerating rate through the pause period until such time that there is a rate reduction. And so that's our expectation as well. And mostly the go to market pricing is generally here pretty consistent if not testing somewhat lower price points. But there's of course sort of an embedded Momentum of somewhat upward bias in terms of pricing for at least end of the quarter here and then we'll see.

Speaker 3

Do we get a rate cut in March? Some aggressive in our view, but it's possible, in which case down beta begins very quickly. Does the rate environment hold out for the pause until September, which case will be kind of a longer period of drift.

Speaker 5

Great. Thank you.

Speaker 3

Thanks for your question, Will.

Speaker 6

Our next question comes from

Operator

the line of Erika Najarian with UBS. Please proceed with your question.

Speaker 7

Hi, good morning. And by the way, whoever wrote that script, The guidance could not be any clearer, so that was great. Just that being said, a few follow-up questions. The loan growth guidance from your peers would imply that the macro outlook, which seems pretty consensus, is indicative of softer opportunities. And perhaps this is a good chance, clearly, You've been telling us for the past few years that you've set yourself up differently, and you've set yourself up differently to outperform.

Speaker 7

And maybe go back through those opportunities that they think that the average loan growth number is certainly notable versus peers and perhaps remind us of why Huntington is a particularly unique set of growth opportunity for this year?

Speaker 3

Erica, this is Steve. I'll start with that because you've asked a broader history. And then, Zach, you may go ahead. So first, We do think the discipline on our aggregate moderate to low risk appetite, which has been in place now for 14 years, has been a governor and it has helped us as we've decided what business to pursue and what not to seek. With that in mind, we've been very purposeful and strategic about growing these businesses.

Speaker 3

And you saw at the Investor Day, a mid teens rated growth like the specialty banking. So we have a very strong middle market core banking set of capabilities. We have a tremendous amount of small business capabilities and capacity. We have market density in Ohio on small business, We're achieving that now in other states. So the core sort of regional banking franchise is performing very, very well.

Speaker 3

You add to that the specialties that have been put in place, just 3 new ones last year, which by the way, they're all off to terrific starts. And then the expansion, we've been in like Dallas and Charlotte for a decade or more. When we see opportunities, we may pursue them. An example of that is in the Carolinas, where we believe we've got a fantastic group of new colleagues Coming to us with teams, these are some just outstanding people that we've been following for years. It all came together.

Speaker 3

We were investing, others were not, and there was a moment to be dynamic. In addition to that, we still have opportunities in these TCF markets. We're doing incredibly well in Michigan. But I would say we're early stage still in Chicago, the Twin Cities and Denver. And we like those markets, each of those markets.

Speaker 3

So we believe with the investments we've made in specialty banking, the core regional bank performing well with opportunity, we've got Lots of growth potential in the next few years. And that's with the I didn't talk about the asset finance business. Our Our distribution finance business is a horse. They had a phenomenal year last year. Our auto business is one of our best businesses.

Speaker 3

We've got one of our really terrific in that area. Floorplan has done very, very well in terms of its growth as well. So lots of growth options. The equipment finance more broadly, a lot of growth options in that. And we're seeing that through the cycle.

Speaker 3

And so we believe we're poised to outperform and budgeted and expect our colleagues to do so in the coming years. This is Zach. I'll just tackle 2 things. First of all, thanks for the complement in terms of the guidance and All the credit to our terrific investor relationships team. But just the one thing I would add on top of that is We were pretty purposeful about staying on a growth footing across the board and importantly in terms of financial resources and investments that we're putting against our core growth opportunities and recognize that the net outcome of that, including some of the other things that we want to do in terms of data and automation capabilities, would result in an overall expense growth that was higher than we would want to have relative to revenue growth, higher than we would typically target It certainly was something we discussed at length, as you know.

Speaker 3

But we took that view purposely and recognized it was contrarian because In our view, the long term earnings potential of staying in that growth posture is so much more advantageous than were we to have really significantly ratcheting the back of investments and expenses. And so a bit of short term challenge with respect to operating leverage will yield Very significantly better earnings growth trajectory through the course of 2024 2025, the earnings outlook looks exceptionally strong as well. So just to tack on Steve's point, I think the whole system is really working and now

Speaker 7

For sure. And you had the capital. So, it all makes sense. And just a follow-up Again, so many moving pieces in terms of the rate outlook. But Zach, if maybe update us on your rate sensitivity as of twelvethirty one, after some of the meetings that you made in terms of your balance sheet management?

Speaker 7

And also, if you could give us a little bit more detail about what you mean in terms of managing the betas on the way down at a similar discipline. And I wonder if you could give us maybe your expectations on deposit data for the first 100 basis points of rate cuts?

Speaker 3

Sure. Great questions, both. There's a lot in there to unpack. So I'll address those As it relates to asset sensitivity for December, I expect it to be roughly consistent with the asset sensitivity we saw that was reported in October and you'll see that come out in the Q sorry in the K. As we discussed over time, business is natural, the asset side to do.

Speaker 3

And so clearly, on the way up with the interest rate cycle, we've benefited very significantly in terms of margin expansion in revenue growth. I will note as well, I mean, just important to assess as you're thinking about asset sensitivity is in our securities portfolio. As you know, we hedged a large portion of our variable for sale securities, which has benefited in terms of yields rising higher protecting capital in the asset sensitivity metric in the down and under ramp scenario, for example, represents about a percentage point of additional sensitivity from those swaps. Those swaps will roll off over the course of the next 12 to 18 months And most of that impact and sensitivity will begin to ramp off starting in the second half of twenty twenty four and continuing on for about a 12 month period thereafter. The other thing I'll just say is that as an important point is those sensitivity metrics are pretty academic and not standardized the industry with lots of assumptions, the beta being the most significant, but also whether those analyses are ramps on top of the forward curve or whether they're just from a start point, ours is a ramp on top of the forward curve.

Speaker 3

So certainly, advice is important to assess those assumptions pretty carefully when comparing those metrics across firms. Back to so in terms of our balance sheet management posture, incrementally from here, I see the opportunity to to add downside rate reduction hedges. Our hedging strategy is incrementally shifting from a focus on capital protection to a focus on down rate protection as we discussed in the prepared remarks, and we added some of that in Q4. I suspect we'll continue to be incrementally adding into those down rate protection strategies over time, which would gradually reduce downside asset sensitivity. In terms of deposit beta and what we would be expecting for the 1st x basis points, our To give you a sense, in the scenario that I'm looking at where rates, in fact, begin to fall in March and then have five cuts in those, it's a little more than your scenario.

Speaker 3

We would expect to see about a 20% roughly down beta over a 3 quarter period by the end of 2024 would of course be less than that if there was an extended pause through some of the summertime period, but to give you a sense of the sensitivity to your question.

Speaker 7

So clear. Thanks so much.

Speaker 3

Thanks, Erica.

Speaker 6

Our next question is from

Operator

the line of John Pancari with Evercore ISI. Please proceed with your question.

Speaker 8

Good morning.

Speaker 4

Good morning, John.

Speaker 8

On the capital front, I know your CET1 increased nicely about 15 basis points to turn the quarter in the 4th quarter. Just as you look at your trajectory here and your outlook for earnings and capital organic capital generation, how are you thinking about potentially ramping up buybacks and capital return overall? Thank you.

Speaker 3

Great question, John. Thanks. This is Zach. I'll take that one. We're very pleased with the outcomes around the overall action plan we've had with respect to managing capital on our capital priorities throughout the course of 20 3, as we've talked about actively modulating the pace of loan growth to balance additional loan growth and revenue with also accreting Capital on the balance sheet, clearly in the 4th quarter benefited significantly from a recapture of AOCI, which allows us now to even yet again accelerate the pace of loan growth as we discussed earlier.

Speaker 3

And for the foreseeable future, I see us continuing on with that posture, Driving the most important capital priority we have is to fund higher term loan growth. And there is a significant opportunity for us to do that, which is the most value creating decision that's in front of us. And importantly, at 8.6%, our adjusted CET1 is it has been rising a lot and we want to drive that into the 9% to 10% operating range that we've discussed over time. So I think for the foreseeable future, we'll continue on with that plan. Once we get into the 9% to 10% range with adjusted CET1, we'll reassess our posture with respect to share repurchases.

Speaker 3

Over time, share repurchases are really important or a part of the value creation model for the company and I absolutely expect us to get back to them. And we're going to drive through those outcomes as soon as we possibly can. And John, as Zach shared with you in the Q3 call, we are advancing as if the Pending capital requirements are in place. So we're building capital now that will

Speaker 8

Steve, I guess related to that, maybe if you could just talk about the whole debate around the need for scale As you look longer term at the evolution that's going on right now within the regional banks, post the last year's failures and So the regulatory requirements and the need for scale to compete, how do you view the potential for whole bank M and A as a role in Huntington's outlook? And what's the earliest you think from an industry perspective, not necessarily for Huntington, that do you think we can actually see a pickup in whole bank M and A given the backdrop in regulators?

Speaker 3

Well, that's a serious question, John. I'll try to answer them, but I may miss on one aspect. Let's just back up for a moment. You had 3 idiosyncratic banks fail. And you've seen the rest of the industry sort of adjust and adapt and respond very quickly.

Speaker 3

And the core strength of the industry, I don't think, It's in question now. For us, we believe that having a very focused, disciplined and a broadly diversified set of businesses. And we've been able to build those and achieve that foot posture and it has served us very, very well as we've seen in the second half of last year and continuing to this year. So we're very bullish on our ability to organically grow and expect and that's our focus. We'll continue to do that.

Speaker 3

You may see further announcements from us this year in terms of organic growth moves. And I expect that we will continue to be maybe a bit contrarian, but agile as we continue to advance. We think we have tremendous opportunities already in the business lines that we have. So In terms of scale, I think the regulatory response is In reaction to those three failures, it's raising questions about how much tailoring will the industry or banks will benefit from in the industry over time. The expectations have clearly increased As they should.

Speaker 3

And we are investing In our risk management platform, I think I shared on the Q3 call, for example, we will have much better intraday visibility of deposit flows in the near term as a consequence. There are a series of things like this that we're addressing. Now I don't know the we've been investing in risk management since I arrived in 2009. So I don't know how we compare really compare to other banks. I think We've always viewed the stress test results where we've been top quartile or even leading in terms of the portfolio stresses by the regulators as a barometer.

Speaker 3

And it looks like that was a very good measure, at least at this point. So We're not anticipating a change in posture at this stage. We don't feel compelled to we have to do something. And yet at the same time, should there be opportunities somewhere in the future, we'd take a look. But it has to be In a risk adjusted context, it makes sense to us.

Speaker 3

And I don't see that activity in 'twenty four. I think we've got a tremendous amount of core growth to deliver and we're excited by that.

Speaker 8

Great. Thanks, Steve.

Speaker 3

Thanks, John. Thank you. Our

Operator

next questions are from the line of Steven Alexopoulos JPMorgan. Please proceed with your question.

Speaker 9

Hey, good morning everybody.

Speaker 3

Good morning, Steve. So I want to

Speaker 9

start, re exact Big picture. So historically, a steep yield curve has been a positive catalyst for bank margins and earnings. But given how you position the balance sheet right with the use of Have you in that sense created away much of that potential benefit in order to have a more stable NIM today?

Speaker 3

Great question, Steve. I think the short answer to your question is no. A steeper yield curve continues to benefit us. Obviously, that environment would be indicative of funding costs, which are which would represent solid margins against where asset yields are. I think we're in this really strange environment with inverted yield curves and with a dramatic reduction forecasted pretty quick here.

Speaker 3

So we'll see how it all plays out. But I think for us, the puts and takes with respect to NIM outlook in the moderate term, 3.24, 1, we're going to continue to benefit very significantly from fixed asset repricing. We tried to provide some incremental clarity about that in the prepared remarks in the presentation. So you're seeing 50 basis point moves in overall portfolio yield in key FX categories. We'll continue to see that benefit us Not only the 2024, but the 2025 and beyond.

Speaker 3

Another thing is for us As the curve becomes less inverted, we will see our negative carry from our down rate hedge protection program reduce. The negative carry impact by the way in Q4 then was around 17 basis points of drag. We've talked about likely we'll see about 10 bps of that come back to us, if you believe the scenario kind of pretty aligned with the forward curve here over the next 4 quarters. Funding costs, again, in a steeper yield curve environment, where short end rates have fallen, We'll really start to benefit us in terms of beginning to pivot toward down beta and actually executing on down beta to Erica's question earlier. And those things in total essentially offset for us in our NIM the variable yield reduction that we'll see if and when the short end comes down.

Speaker 3

So I still believe that that Goldilocks scenario of a nice upward salted yield curve, It is accretive to margins and it's supportive of it. And the goal we've got is the same, to try to really collar the NIM here, put a floor under it and really position for upside. And I think the last thing I'd say is kind of getting to your question as well, the modeling that we have done about 2025, and we've been saying this for a while, really highlights NIM expansion opportunities, which again is sort indication that the upward sloping yield curve is positive.

Speaker 9

Okay. That's helpful. Zach, I asked the question because earlier you said if there were rates stay higher for longer, your NIM would be about 10 basis points higher in 2024 versus the Fed cutting. But as we move beyond 2025, 2026, there's a clear benefit to them. Are you able to quantify for us like on a longer term basis, assuming the forward curve played out, given What's on and what's rolling off?

Speaker 9

Where the NIM could be in long term for Huntington?

Speaker 3

Sure. Yes. But the point on the higher NIM and the scenario where you say higher for longer is it's not only a scenario where short end stays higher for longer, But also longer, I'd say it's hard for longer. I will note that sort of much of our balance sheet yields that heat off the belly of the curve, the 2 to 5 year range. And so I think that's an important point to consider.

Speaker 3

Look over the longer term, I see north of 3 into the low 3s in terms of NIMs as a sustainable level. Of course, the business mix, it seems to shift. So I think it's hard to really be precise about that. A priori several years out, we'll have to to do our modeling. But over the foreseeable future, we see that range of sort of 3 to 3.10 in a Quicker rate reduction scenario, maybe as much as 10 bps higher than that if rates they are longer through 2024.

Speaker 3

And then I would see another step up into 2025 Assuming the yield curve holds generally as it's more likely to. Got it. Okay.

Speaker 6

Our next question is

Operator

from the line of Jon Arfstrom with RBC Capital Markets. A

Speaker 10

couple of guidance clarifications for you, Zach. When you say 1Q net interest income is a trough, how deep is that trough? How much lower Where do you want us to start, I guess, for 1Q?

Speaker 3

Good question. Q1, by the way, is typically seasonally lower just with day count and just other mix items. And so I think we'll probably see a level that is lower than Q4 by around the same amount that Q4 was lower than Q3 and then begin to grow from there. And so it's really the kind of trajectory from there that's really the major difference in the guidance range given that If you just pull back, loan growth, I would expect in Q1 will be about the same year on year as we saw in Q4, I need around 2%. And then sort of steadily accelerating from there and ending the year growing at or even potentially above the high end of the loan growth range.

Speaker 3

The average should be the 3% to 5% I discussed. There's a trajectory for sure during the year. And likewise, in terms of NIM, I think It's likely that the NIM will likely be at its lowest point in the year in the Q1 and then kind of rising pretty heavily depending on which scenario you look at. But That's a general trajectory I'm expecting.

Speaker 10

Okay, good. I think it's important to set that up. And then on expenses, when you say consistent, there's a lot of hand ringing last quarter on your expense guide. And when you say consistent, are you basically saying flat line expenses quarterly for 2024, meaning that all the expense Investments and hiring and things that you've done are essentially in the run rate today and you don't see a lot of these pressures as 2024 progresses. Is that fair?

Speaker 3

That's an excellent one. I really appreciate the chance to clarify on that. Broadly speaking, the answer is yes. The dollar amount of expenses Overall, we saw on a core basis in Q4. The forecast we've got in our budget represents pretty similar dollar amounts overall for each of the quarters during 2024, coincidentally.

Speaker 3

There's in my mind as I illustrate this picture for you. There's a variety of factors that are kind of offsetting each other and driving within that. I would say there's So a little bit of additional ramp up of run rate, some of the incremental capability investments that we're doing. Likewise, a little bit of additional ramp up in some of these new initiatives like in the commercial business. We're also actively tuning our overall strategic investments to modestly offset that.

Speaker 3

And then lastly, you've got these efficiency programs, which are cumulating in their impact over time. The Business process reengineering initiative we've been driving for quite some time. We internally call it operation accelerates. The business process offshoring initiative, which by the way is also growing, accumulating. So there's sort of a series of factors that are netting together.

Speaker 3

But the result of it is basically dollars that are pretty consistent with a pretty tight range from

Speaker 10

Okay, good. Very helpful. Thank you very much.

Speaker 3

Thank you.

Operator

Thank you. And Bass, please ask Two questions and if you have any return, you may turn to the queue for follow-up. Thank you. And our next question will be from the line of Matt O'Connor with Deutsche Bank.

Speaker 11

This is Nate Stein on behalf of Matt. I just wanted to ask about commercial credit. Commercial Real Estate net charge offs increased versus 3Q level. Can you talk about what drove that and just touch on the outlook for Commercial real estate at credit quality this year. And then on the C and I side, these also continue to normalize.

Speaker 11

Can you talk about what you're seeing in this book? Thank you.

Speaker 4

Sure, Nate. This is Brendan. I'll take that. For the quarter, yes, we did see on a basis point perspective, there was increase in the commercial real estate side, but I want to sort of point you to the dollars there. It was $20,000,000 of charge offs in the quarter, and it really represented 3 transactions.

Speaker 4

So it's consistent with our view of the real estate portfolio at this time, which is From a charge off perspective, the focus will be in the office portfolio. That's where we think that there is potential for lost content, which is why we've our reserves to approximately 10% there. And so what you're seeing in the current quarter is sort of the manifestation of that that we've been delivering for some time. When I take a step back and look more broadly, the portfolio on commercial in general is actually performing pretty well. I The C and I side of the house has had its individual idiosyncratic issues.

Speaker 4

But in general, the strength of the portfolio was the result of our strong portfolio management and our low to moderate risk profile that we target. So I feel really good about the commercial portfolio at this time.

Speaker 3

So Dave, Steve, the charge offs, gross charge offs Q3, Q4 were $2,000,000 apart. It was very, very similar. The difference was in all other recoveries. The pre portfolio is performing very well. The office portfolio As you had minimal losses, 23 bps for the year, Cume charge offs since outstanding.

Speaker 3

We're very pleased with how the performance As it currently, we're confident going forward. Thanks for the question.

Speaker 11

All right. Thank you. And if I could just ask one follow-up on the criticized assets. So these also kicked up in the 4th quarter. Can you talk about what drove that?

Speaker 4

This is Brendan again, Nate. As Zach said in the prepared remarks, really came out of our commercial real estate portfolio. The impact of higher short term rates has persisted and that's what's reflected in those results. Again, we have been signaling through the second half of last year that we expected to criticize to move up, and that's exactly how it played out. Again, we have good confidence in our client selection in that portfolio and good solid reserve against it overall.

Speaker 4

So I guess I would classify that as just more credit normalization across the portfolio.

Operator

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

Speaker 6

Just wanted to follow-up on the loan growth guide, Steve. It does feel at the higher end of what we've seen over the last week from your peers. Sorry if I missed it, but give us a sense of how much of this is just market share gain that you expect versus the underlying growth that you're seeing in these markets and your expectations, I guess, back to GDP growth?

Speaker 3

Well, we've had growth last year of 2%. If anything, I think the signal from the Fed pivot will foster further loan growth for the industry. We are in an advantage position. And so we'll capture share from that, but we also have these specialty banking initiatives in the Carolinas. And they begin with no portfolio, so there's prepayment, repayment risk, obviously, and that's all net loan growth.

Speaker 3

And those groups are off to terrific Sars, we're very, very pleased with the quality of colleagues we've been able to attract to Huntington. And I'm quite confident in Our teams, both the core teams that they'll deliver in our footprint, especially banking teams, and frankly, our consumer lending teams are and that cumulatively should help us achieve or even exceed the goals.

Speaker 6

Got it. And I guess what I didn't hear, Steve, was any mention of fiscal stimulus, the chipset, etcetera, flowing through your market, is that not as meaningful going forward around moving the needle on growth?

Speaker 3

The markets have, Broadly speaking, we're talking about 11, 12 states that we're in with our network. But here in Columbus, which is what you're referring with the Intel plant, that plant is well under construction and the supply chain Commitments will largely be made, we think, this year as they move towards opening in the following year. So we have some unusual factors that are strengthening the outlook here in Greater Columbus. And we have very, very significant market share here and lead by a lot in most categories. And but it will also benefit the broader region.

Speaker 3

And that's one of just many sectors that have chosen the Midwest. Think about batteries from East Michigan Ann Arbor through And some of the announcements last year, including the Honda joint venture here in Greater Columbus on the Battery Front. There's a lot of investment that's being made in the core footprint, all of which will generate economic benefit for the industry. So for the industry and certainly for us with our leadership position in many of these areas. Thanks for the question.

Speaker 3

Thank you. So I think we're hitting the top of the hour. I'm just going to wrap. I want to thank you very much for joining us today. In closing, we're pleased with the 4th quarter results as we dynamically manage through this environment.

Speaker 3

We believe we're well positioned. Investments we made in 'twenty three will further drive revenue growth in 'twenty four and beyond. Our focus is on driving core revenue growth, carefully managing expenses to support investments in the business and growing loans consistent with our aggregate moderate to low risk appetite. The management team is focused on executing our strategies that we previously shared. And as a reminder, the Board executives, our colleagues, we're top ten shareholders, And that creates strong long term alignment with our shareholders generally.

Speaker 3

And finally, we're grateful to Our nearly 20,000 exceptional colleagues have delivered these outstanding results and our perennial award winners for customer service. Thank you all very much. I appreciate your interest in Huntington. Have a great day.

Operator

Thank you. This will conclude today's conference.

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Earnings Conference Call
Huntington Bancshares Q4 2023
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