Last year, we witnessed the most significant bank failures since 2008 when the federal government seized Silicon Valley Bank (a subsidiary of SVB Financial) and First Republic Bank amid bank runs that triggered concern about possible contagion risk.
One bank caught up in the industry's volatility is Huntington Bancshares(NASDAQ: HBAN). Last August, Moody's downgraded several regional banks while putting others on watch for a negative outlook, and Huntington was one of them.
The bank has maintained a strong balance sheet, and recent moves by management should help bolster its financial position further. Its moves help improve important capital ratios and are a positive sign for investors drawn to the bank stock because of its 4.8% dividend yield. Here's what you need to know about the bank's recent moves.
Huntington Bancshares is taking off one of its hedges opened during the banking turmoil
Last year was tough for some regional banks. Interest rates had risen rapidly, and some banks struggled to adjust. Banks with niche customers, like Silicon Valley Bank, which serves venture capital and start-ups, saw deposit outflows while sitting on sizable losses (due to higher interest rates) on their loan portfolios.
Huntington Bancshares, the 20th largest bank in the U.S. by assets, took measures in March to protect itself from the threat of higher interest rates. The bank implemented a pay-fixed swaption program to protect the market value of its securities in the event interest rates jumped another two to three percentage points. This program functioned like insurance on its portfolio and hedged it against any future interest rate shocks.
Image source: Getty Images.
Last month, the Federal Reserve held interest rates steady for the third consecutive meeting, and many expect that the aggressive interest rate hiking campaign is over for now.
Federal Reserve officials project that there could be three interest rate cuts in 2024. Meanwhile, CME Group's FedWatch Tool shows that market participants expect up to six rate cuts during the year. For this reason, Huntington no longer saw this hedge as necessary and recently closed out the program at a total cost of $24 million.
Huntington also made moves to transfer risk and strengthen its financial position
In another move, Huntington completed a synthetic credit risk transfer (CRT) transaction relating to $3 billion in prime indirect auto loans on its balance sheet. The transaction helped Huntington reduce its risk-weighted assets by about $2.4 billion.
Risk-weighted assets determine how much capital a bank must hold based on how risky those loans or other assets are. This measure is important for banks because it is used to calculate the Common Equity Tier 1 (CET1) ratio, which compares a bank's capital to its risk-weighted assets to determine how well it can withstand financial stress. Huntington's CET1 ratio had improved to 10.1% in the third quarter of this year compared to 9.27% one year earlier. By offloading these loans, Huntington modestly strengthened its CET1 ratio.
Image source: Huntington Bancshares.
Huntington Bancshares' moves follow news of the FDIC's Deposit Insurance Fund Special Assessment. This assessment will replenish funds to the Deposit Insurance Fund, which took a hit when the agency protected uninsured depositors following the failures of Silicon Valley Bank and Signature Bank.
Huntington's share of this assessment will result in a $214 million in the fourth quarter, and the net of the moves will boost its CET1 ratio by 5 basis points, keeping it on the high end of its CET1 target range of 9% to 10%.
Huntington is well-positioned for potential changes in capital requirements
The move by Huntington Bancshares is a good one that helps moderately strengthen its financial position. The bank has an appealing dividend that yields 4.8% and a reasonable payout ratio of 41%. Investors can take comfort in seeing the bank making prudent moves to bolster its capital position, albeit modestly, to prepare for the Basel III endgame and other capital requirements as we enter 2024.
Huntington may benefit from other tailwinds next year. Falling interest rates could spur loan growth and help improve its net interest margin, which has declined from last year. By removing the hedge on its portfolio, Huntington is well positioned to benefit from interest rate cuts from here.
The bank's stock is down about 22% from its peak in January 2022 and trades at 8.3 times earnings -- below its 10-year average of 13.5. However, the stock has surged 38% over two months, and its price-to-tangible book value of 1.86 is above its 10-year average of 1.79. Therefore, investors may want to wait for a dip from here before adding shares of this high-yielding dividend stock.
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SVB Financial provides credit and banking services to The Motley Fool. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
