Shares of Huntington Bancshares (NASDAQ: HBAN) tumbled 5.1% to $17.33 on Thursday, significantly underperforming the broader regional banking sector. The SPDR S&P Regional Banking ETF (NYSEARCA: KRE) slipped just 0.9% during the same session, highlighting investor concerns specific to Huntington's rising funding costs and weaker net interest income outlook.
The Columbus, Ohio-based lender reported organic deposit growth of $4.0 billion in the second quarter, nearly double its $2.2 billion increase in organic loans. However, the cost of interest-bearing deposits rose eight basis points to 2.29%, while yields on average earning assets edged up only one basis point to 5.28%. This divergence compressed the core spread by five basis points and drove net interest margin down three basis points to 3.21%.
In a stark contrast, KeyCorp (NYSE: KEY) managed to lower its total deposit cost by two basis points to 1.63% and expanded its net interest margin by two basis points to 2.89%. KeyCorp shares fell only 1.8% on Thursday. The comparison underscores the market's sensitivity to funding cost dynamics in the current interest rate environment.
Chief Financial Officer Zach Wasserman noted during the earnings call that deposit costs and the pricing environment represent the most significant change in the bank's net interest margin outlook. Management now expects full-year net interest income to land at the lower end of its guidance range, with potential for it to fall slightly below that level. Average loan balances are pacing at or above the high end of expectations, while fee income is on track to meet or exceed the top of the anticipated range.
Despite the margin pressure, Huntington reported solid quarterly performance. Net income surged 39% from the prior quarter to $727 million, and adjusted earnings per share rose two cents to $0.39. Net interest income increased 9% to $2.05 billion, while noninterest income advanced 15% to $785 million, reflecting a growing contribution from fee-generating operations in the second half.
Chief Executive Steve Steinour characterized the bank's pipelines as “robust” heading into the second half. Management projects net interest margin to remain in the low 3.20% range for the third quarter, improving to the mid-to-high 3.20% range by year-end. However, the market's reaction suggests that volume alone is insufficient to offset the drag from higher funding costs.
The equity value lost on Thursday is estimated at nearly $1.9 billion, roughly 12 times the $152 million pretax charge for acquisitions recorded during the quarter, indicating investor concerns extend beyond integration expenses. At $17.33, the stock traded at approximately 1.80 times tangible book value, down from about 1.89 times before the earnings release. Tangible book value per share stood at $9.65.
Credit quality remained manageable, with net charge-offs declining one basis point to 0.25% of average loans. However, nonperforming assets increased to 0.85% from 0.72%, and the estimated CET1 ratio edged down to 10.0% from 10.2%. Ongoing competition for deposits may delay the expected recovery in margin, posing a key challenge for Huntington as it seeks to convert its deposit growth into lower-cost marginal funding.
