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Market Cap £7.29bn
Enterprise Value £15.15bn
Revenue £3.56bn
Position in Universe 117th / 1040

Fitch Affirms Huntington at 'A-/F1'; Outlook Revised to Negative on Expected Coronavirus Impact

Tue 28th April, 2020 9:36pm
(The following statement was released by the rating agency)


Fitch Ratings-Chicago-April 28: 

Fitch Ratings affirmed Huntington Bancshares, Inc.'s (HBAN) Long-Term and 
Short-Term Issuer Default ratings of 'A-' and 'F1', respectively. The Rating 
Outlook is revised to Negative from Stable, reflecting significant operating 
environment challenges due to the disruption to economic activity and financial 
markets from the coronavirus pandemic. This review is part of Fitch's ongoing 
horizontal review of all U.S. banks.

Fitch revised the Rating and Sector Outlook from stable to negative for all U.S. 
banks on March 18, 2020 ("Fitch Ratings: Sector and Rating Outlook for U.S. 
Banks Revised to Negative," available at fitchratings.com) reflecting the 
expectation that credit fundamentals for the sector will deteriorate in the 
near-to-medium term. Fitch believes the drop in short- and long-term rates will 
adversely impact spread revenue on a sustained basis while fee income will also 
be hampered from lower levels of client activity. Bank profits will be further 
pressured from higher levels of provisioning for credit losses under the Current 
Expected Credit Loss (CECL) accounting framework. Fitch expects credit quality 
for issuers with relatively more exposure to industries and asset classes 
affected by the spread of coronavirus to be significantly more adversely 
affected over the course of the next two to three quarters than contemplated in 
Fitch's U.S. Bank Outlook published during fourth-quarter 2019, available at 
fitchratings.com.

Along with a revised Global Economic Outlook, Fitch also has published a common 
set of baseline and downside-scenario parameters against which all ratings 
groups globally are evaluating the impact of the coronavirus pandemic. As part 
of this portfolio review, rating actions have been taken in line with expected 
trajectories under the baseline scenario. For more information please refer to 
"Fitch Ratings: Coronavirus Baseline and Downside Scenarios" published April 2, 
2020, available at fitchratings.com.

Key Rating Drivers

IDRS, VRS AND SENIOR DEBT

Unless noted below, the key rating drivers for HBAN are those outlined in our 
Rating Action Commentary published in December 2019 ("Fitch Affirms Huntington 
Bancshares at 'A-'; Outlook Stable," available at fitchratings.com). 

In affirming HBAN's ratings, Fitch is signaling its view that the bank enters 
this pandemic and ensuing sharp financial downturn in a position of reasonable 
strength underpinned by a solid franchise and diverse business mix. Fitch 
believes that HBAN's ratings have moderate headroom, such that an Outlook 
revision to Stable from Negative without a downgrade is possible. 

HBAN's current rating level implies solid financial performance compared to 
benchmark levels in Fitch's Bank Rating Criteria over the course of a normal 
business cycle. However, given the level of expected earnings pressure and 
credit performance, the Outlook has been revised to Negative as Fitch sees 
moderate risk of HBAN not returning to implied benchmark financial performance 
associated with its current 'A-' Long-Term IDR by year-end 2021, even with a 
potential economic recovery beginning in second-half 2020.

Fitch views HBAN's earnings and profitability factor score of 'a-' as vulnerable 
to downward pressure over the rating time horizon. The abrupt change in the 
operating environment brought on by the spread of the coronavirus introduces 
significant risk to the credit profiles of both consumer and commercial 
borrowers, which is expected to lead to significant increases in provisioning. 
Fitch expects higher credit losses to materially impact earnings, including 
provisions against performing loans under CECL. In 1Q20, the yoy provision for 
credit losses increased six-fold, to $441 million from $67 million in 1Q19. This 
could continue to increase in the face of further economic deterioration. The 
decline in interest rates beginning in 2H19 has led to 25bps of net interest 
margin (NIM) compression yoy. Fitch expects the decline in interest rates to 
continue to place moderate pressure on HBAN's NIM, as well as those of its 
peers. Combined, these factors are expected to result in a significant decline 
in net income throughout 2020 and into 2021.

Additionally, Fitch expects that HBAN's noninterest income will experience 
downward pressure. Card and payment processing is likely to be depressed due to 
lower business volumes. Likewise, deposit services charges could decline due to 
reduced transaction activity on accounts. Mortgage banking could offset some of 
this pressure to the extent that originations remain at elevated levels. 

Fitch expects that these profitability headwinds will be partially offset by 
modest fee revenue from government loan programs. HBAN has been an active 
participant in the Paycheck Protection Program, with approximately $6.1 billion 
in loans approved during the first round of lending. As these loans are forgiven 
by the SBA and fee revenue is recognized, it could provide a backstop to 
pressured earnings. Fitch notes that, to the extent that these loans remain on 
the balance sheet for longer terms, and the recognition of the fee revenue is 
likewise stretched, they could have a dilutive effect on NIM.

Fitch anticipates negative pressure on HBAN's asset quality slotting of 'a-'. As 
Fitch expects that the coronavirus will impact nearly all economic sectors, the 
agency expects asset quality metrics to deteriorate from the benign levels in 
recent years. Fitch anticipates that credit losses will begin to manifest in 
2Q20 and beyond for the entire U.S. banking sector. HBAN could experience an 
outsized effect due to concentrations in consumer lending. Specifically, 
indirect auto and RV/marine vehicle lending could come under pressure from 
rising unemployment levels. The impact of unemployment will likely be somewhat 
offset by forbearance programs, such as loan deferrals, as well as government 
programs to replace or protect household incomes. 

In commercial lending, to the extent that current lockdowns persist, floorplan 
lending would be expected to be adversely impacted as dealerships are largely 
shut down and inventories are stagnant. Additionally, while oil and gas only 
makes up 1.5% of total loans, as of 1Q20, it represented 33% of nonperforming 
assets. The recent extreme dislocations in these markets could lead to outsized 
losses in this portfolio. 

HBAN's capital profile remains in line with the large regional peers, but is 
expected to be pressured throughout 2020, due to an increase in risk weighted 
assets in 1Q20, as well as a reduction in the bank's ability to accrete capital 
through earnings due to increased provision levels. HBAN's CET1 of 9.47% at 1Q20 
was down from 9.88% on a linked-quarter basis. Fitch has maintained the Outlook 
for HBAN's 'a-' capitalization and leverage factor score at Stable. 

HBAN reserve coverage on the total portfolio increased to 2.05% in 1Q20, from 
1.70% as of Jan. 1, 2020. The reserve building for 1Q20 included $258 million 
tied to economic uncertainty and $65 million in specific reserves, predominately 
tied to oil and gas exposures, with are now reserved at 20% of that portfolio.

The duration of depressed economic activity and heightened unemployment related 
to the coronavirus spread and resultant COVID-19 disease remains uncertain and 
depends on the success of containment efforts that are difficult to predict. 
Therefore, to the extent that there is a slower than anticipated recovery (i.e. 
Fitch's Downside Scenario), Fitch may review HBAN's ratings and Outlook further.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Fitch upgraded HBAN's preferred stock rating to 'BB+' from 'BB'. With this 
action, this rating is no longer under criteria observation. In line with 
Fitch's updated Banking Rating Criteria published on Feb. 28, 2020, the 
preferred stock rating is notched four levels below HBAN's VR, 2x for loss 
severity and 2x for non-performance.

Fitch has affirmed HBAN's subordinated debt rating at 'BBB'. The rating is 
notched one level below HBAN's VR for loss severity. In accordance with the Bank 
Rating Criteria, this reflects alternate notching to the base case of two 
notches due to our view of U.S. regulators' resolution alternatives for an 
entity like HBAN as well as early intervention options available to banking 
regulators under U.S. law. 

HBAN's trust preferred securities are notched four levels below its VR, 2x for 
loss severity and 2x for non-performance.

These ratings are in accordance with Fitch's criteria and assessment of the 
instruments' non-performance and loss severity risk profiles and have been 
affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

HBAN's uninsured deposits are rated one notch higher than the bank's IDR and 
senior unsecured debt because U.S. uninsured deposits benefit from depositor 
preference. U.S. depositor preference gives deposit liabilities superior 
recovery prospects in the event of default.

HOLDING COMPANY

HBAN's VR is equalized with those of its operating companies and banks, 
reflecting its role as the bank holding company, which is mandated in the U.S. 
to act as a source of strength for its bank subsidiaries. Ratings are also 
equalized reflecting the very close correlation between holding company and 
subsidiary failure and default probabilities. 

SUPPORT RATING AND SUPPORT RATING FLOOR

HBAN has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In 
Fitch's view, the probability of support is unlikely. IDRs and VRs do not 
incorporate any support.

RATING SENSITIVITIES

IDRs, VRs AND SENIOR UNSECURED DEBT

In light of the rapidly evolving economic backdrop, Fitch expects that HBAN's 
ratings and/or Outlook, as well as those of all other U.S. banks, may be subject 
to more frequent review than in a normal operating environment.

Factors that could, individually or collectively, lead to negative rating 
action/downgrade:

Negative pressure could be placed on HBAN's ratings should there be evidence of 
outsized deterioration in the level and volatility of earnings, relative to 
peers. For instance, a failure to maintain an implied earnings rating of 'bbb' 
could warrant a ratings downgrade. Likewise, a significant deterioration in 
asset quality could drive negative action. Pressure could emerge if impaired 
loans to gross loans were to meaningfully exceed 3% and be expected to remain 
above that threshold for an extended period. Fitch notes that at YE 2019, this 
ratio stood at 1.5%.

Furthermore, the bank's rating would be at risk if its Common Equity Tier 1 
(CET1) were to approach or ultimately dip below Fitch's lower bound for an 
implied factor score of 'bbb' (8.0%) and remain there for multiple quarters 
absent a credible plan to build levels back above this threshold. 

Fitch understands that HBAN, along with its peers, has been directed by 
regulators to use capital and liquidity buffers to support the economy. Thus, 
Fitch does not expect its CET1 ratio to meaningfully increase throughout 2020.

Factors that could, individually or collectively, lead to positive rating 
action/upgrade:

Over the medium term, should economic conditions turn positive and HBAN's 
financial performance show signs of normalizing at or above Fitch's 
expectations, the Rating Outlook could be returned to Stable. This would include 
HBAN's earnings returning to prepandemic levels, as well as asset quality 
stabilizing in line with, or better than peers. This is predicated on the bank 
maintaining a conservative risk appetite and a return to the upper end of the 
target range for capital levels.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for HBAN's and its operating company's subordinated debt, trust 
preferred securities and preferred stock are sensitive to any change to the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to HBAN's 
long- and short-term IDRs.

HOLDING COMPANY

Should HBAN's holding company begin to exhibit signs of weakness, demonstrate 
trouble accessing the capital markets or have inadequate cash flow coverage to 
meet near-term obligations, there is a potential that Fitch could notch the 
holding company VR from the ratings of the operating company.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since HBAN's Support Rating and Support Rating Floor are '5' and 'NF', 
respectively, there is limited likelihood that these ratings will change over 
the foreseeable future.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance, if present, is a score of 3. This 
means ESG issues are credit-neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or to the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Huntington National Bank, The; Long Term Issuer Default Rating; Affirmed; A-; 
RO:Neg

; Short Term Issuer Default Rating; Affirmed; F1

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

----senior unsecured; Long Term Rating; Affirmed; A-

----long-term deposits; Long Term Rating; Affirmed; A

----short-term deposits; Short Term Rating; Affirmed; F1

Huntington Capital II

----preferred; Long Term Rating; Affirmed; BB+

Huntington Capital I

----preferred; Long Term Rating; Affirmed; BB+

Huntington Bancshares Incorporated; Long Term Issuer Default Rating; Affirmed; 
A-; RO:Neg

; Short Term Issuer Default Rating; Affirmed; F1

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

----senior unsecured; Long Term Rating; Affirmed; A-

----subordinated; Long Term Rating; Affirmed; BBB+

----preferred; Long Term Rating; Upgrade; BB+

Sky Financial Capital Trust IV

----preferred; Long Term Rating; Affirmed; BB+

Sky Financial Capital Trust III

----preferred; Long Term Rating; Affirmed; BB+

Contacts: 

Primary Rating Analyst

Brian Thies, 

Associate Director

+1 312 606 2316

Fitch Ratings, Inc.

One North Wacker Drive 

Chicago 60606

Secondary Rating Analyst

Christopher Baker, 

Director

+1 312 606 2361

Committee Chairperson

Christopher Wolfe, 

Managing Director

+1 212 908 0771

 

Media Relations: Hannah James, New York, Tel: +1 646 582 4947, Email: 
hannah.james@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10110041

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10119295

Solicitation Status 

https://www.fitchratings.com/site/pr/10119295#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10119295#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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