BMO Downgrades Huntington Bancshares, Calls Premium Valuation Difficult To Justify

Ohio-based regional bank Huntington Bancshares Incorporated HBAN is trading at a premium valuation to its peers but this will be difficult to justify moving forward, according to BMO Capital Markets.

The Analyst

BMO's Lana Chan downgraded Huntington Bancshares from Market Perform to Underperform with an unchanged $14 price target.

The Thesis

BMO's new stance on Huntington Bancshares is based on expectations for the Federal Reserve to implement 25 basis point cuts in September, March 2020 and September 2020, along a 10-year Treasury yield of 2.10%, Chan wrote in the note. The company also has above-average exposure to one-month LIBOR products, which has been negatively impacted by the six basis point decline in the second quarter on average.

Given the multiple headwinds, management's guidance for a stable GAAP NIM (Net interest margin) throughout 2019 is now called into question. Bancshares' guidance doesn't assume changes in the Federal Fund rate while the company is likely impacted by hedging costs to reduce asset sensitivity.

Management's guidance also assumes it is able to "protect" its NIM by keeping fiscal 2019 IBD beta to 50% after coming in at 40% in the first quarter. As such, Chan said the company be forced to chose between protecting its NIM or prioritizing balance sheet growth.

Shares of Huntington Bancshares are trading at a 3% premium to its regional bank peers on a 2020 EPS basis. Chan said the premium valuation will be "hard to sustain" given the potential NIM headwinds along with the potential for a slowdown in balance sheet expansion.

Price Action

Shares of Huntington Bancshares were trading lower by 1.6% at $13.70 Monday afternoon.

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