Q4 2022 Huntington Bancshares Inc Earnings Call
Greetings and welcome to Huntington Bancshares fourth quarter earnings call.
At this time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Minder This conference is being recorded.
At this time I would now like to turn the conference over to your host Jim <unk> director of Investor Relations.
Thank you operator, welcome everyone and good morning copies of the slides, we'll be reviewing today can be found on the Investor Relations section of our website at Www Dot Huntington Dot Com as a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
Our presenters today are Steve spinner, Chairman, President and CEO , Zach Wasserman, Chief Financial Officer.
Rich Pohle, Chief Credit officer will join us for the Q&A, earning.
Earnings documents, which include our forward looking statements disclaimer and non-GAAP information are available on Investor Relations section of our website with.
With that let me now turn it over to Steve.
Thanks, Tim Good morning, everyone and welcome. Thank you for joining the call today.
We are very pleased to announce our fourth quarter results, which included GAAP net income of $645 million and adjusted net income of $657 million for.
For the full year reported GAAP net income was $2.2 billion and adjusted net income was $2 $3 billion. Both results reflect record earnings for Huntington 20.
22 marked a year of numerous successes driven by our team's execution of organic growth initiatives realization of both expense and revenue synergies from the Tcf acquisition and unwavering focus on credit discipline and proactive balance sheet management, we ended the year with substantial momentum.
Hmm.
Clearly the economic environment is becoming increasingly challenging however, huntington is better positioned today than at any time since I joined over a dozen years ago and over those years, we've transformed the risk profile of the bank and remained highly disciplined we're taking proactive steps now to again position.
Huntington to outperform and we entered the year with solid capital levels.
Top tier reserves are growing core deposit base and strong credit metrics, we continue to see opportunities to grow revenue and profit now on to slide four.
First we finished the year with our fourth consecutive quarter of record pre provision net revenue.
This was supported by higher interest income driven by earning asset growth and an expanded net interest margin revenue growth has been exceptional over the course of the year and we intend to protect and grow that revenue base.
Second we delivered broad based loan growth X P. P. P of 10% year over year as we drove this growth. We also optimized for return while still exceeding our loan growth outlook. One example of this optimization is indirect auto where our production in the quarter was approximately 15% lower than the prior.
Quarter, while our new loan yields increased by over 100 basis points Importantly, we continued to grow our deposit base with multiple consecutive quarters of growth. We believe this is a differentiator for Huntington in this environment. It also demonstrates the breadth of our franchise and our colleagues' ability to acquire and deep.
And primary bank customer relationships.
Third our financial results for the fourth quarter and full year reflect the top tier return profile and we're at or above our medium term targets. These results demonstrate the earnings power of the company and we expect to continue to deliver on these targets as we intended we delivered common equity tier one capital to the middle of.
Our 9% to 10% operating range. We are also very pleased to announce a new two year share repurchase program.
Fourth we ended 22 with strong momentum across the business that we carry into this new year, we remain focused on growth aligned with our risk appetite importantly, we had the capital credit reserves and strength of balance sheet that gives us confidence to continue to deliver on our organic growth.
Priorities.
Slide five highlights the tremendous earnings power of the franchise, which has improved sequentially over the course of the year P. P. N. R is over 60% higher than pre pandemic levels. Our return on tangible common equity is top tier we.
We managed our asset sensitivity throughout the year and deliberately positioned the company to benefit from higher interest rates, which resulted in significant revenue growth. We've also been prudent and taking actions to protect this revenue base should we experienced lower rates over the next few years, we will continue to be dynamic in this regard with our go.
We'll of reducing volatility and creating a tight corridor around the path of spread revenue.
At our Investor Day in November we shared with you our highly defined set of strategic priorities.
We expect these strategies will drive sustained revenue growth and support gains in efficiency over the long term as you also heard this management team is a group of experienced operators.
To further accelerate the execution of these strategies and support increased efficiency, we will be taking a series of actions during twenty-three to align our organizational structure with a focus on our critical priorities.
We expect these actions will result in new growth and efficiency opportunities, we will share more details on these actions as they are finalized over the course of the first quarter. However, one element will be a voluntary retirement program for our middle and senior management overall I believe this program will be important to support our colleagues.
And create value for our shareholders.
In closing we are well positioned for continued growth we have the strategies the momentum in our businesses to support growth. We also benefit from highly engaged colleagues who've consistently delivered outstanding customer service and are a true differentiator with our credit discipline to outperform and remains focused on rigorous expense management.
Investment prioritization and capital allocation, we remain committed to our long track record of managing to positive annual operating leverage and are intently focused on driving shareholder value zac over to you to provide more detail on our financial performance.
Thanks, Steve and good morning, everyone slot.
Slide six provides highlights of our fourth quarter results.
We reported GAAP earnings per common share of 42 cents and adjusted EPS was <unk> 43 cents return on tangible common equity or R. O T. C. He came in at 26% for the quarter.
Adjusted for notable items R O T C. He was 26.5%.
Further adjusting for a O C. I R. O T C was 19, 8%.
Loan balances continued to expand as total loans increased by $1.9 billion and excluding P. P. P increased by $2.1 billion deposit balances increased by $1.6 billion on an end of period basis, while average deposits were essentially flat compared to the prior quarter.
Pre provision net revenue expanded sequentially by four 2% from last quarter to $893 million and on a full year basis year over year increased by 36% to $3 $2 billion credit quality remains strong with net charge offs of 17 basis points and nonperforming assets declined.
Climbing to 50 basis points.
Turning to slide seven average loan balances increased 1.7% quarter over quarter, driven by both commercial and consumer loans.
Commercial loans continue to represent the majority of loan growth within commercial excluding P. P. P <unk>.
Average loans increased by $1.9 billion or two 7% from the prior quarter.
Primary components of this commercial growth included distribution finance, which increased $900 million tied to continued normalization of dealer inventory levels as well as seasonality with shipments of winter equipment, arriving to dealers.
We also saw the continued long term trend of demand within our asset finance businesses, which drove balances $300 million higher in the quarter.
Commercial real estate balances increased by $500 billion.
Largely as a result of production late in the third quarter and lower Prepays end of period balances were higher by $180 million.
Auto floor plan utilization continued to normalize which drove balances higher by $300 million.
Additional increases in line utilization over time represents a substantial ongoing opportunity.
We also saw higher balances in specialty verticals, such as mid corporate and tech and telecom, which were offset by lower balances in other areas as a result of a return optimization initiatives.
In consumer growth was led by residential mortgage which increased by $500 million.
On sheet production outpaced runoff and was supported by slower prepaid speeds, partially offsetting this growth were lower auto balances, which declined by $230 million in RV marine which declined by $50 million turning to slide eight we delivered $1.6 billion of deposit growth.
For the quarter and $4.6 billion for the year on an ending basis.
On an average basis deposits were lower by two tenths of 1%, while increasing two 4% year over year.
Competition for deposits has intensified beginning in earnest in September and continuing into the fourth quarter.
Notwithstanding that we are pleased with the traction we saw over the course of the quarter as our teams delivered robust production demonstrating the deposit gathering capabilities across the bank.
Ending deposit growth was led by consumer which increased by $1.6 billion.
We saw a mix shift in line with our expectations, including incremental growth in both money market and time deposits. We continue to remain disciplined on deposit pricing with our total cost of deposits coming in at 64 basis points for the fourth quarter, we will remain dynamic balancing core deposit growth.
The competitive rate environment, and the utilization of a broad range of funding options.
On slide nine we reported another quarter of sequential expansion of both net interest income and NIM.
Core net interest income excluding P. P P and purchase accounting accretion increased by $67 million or 5% to $1.459 billion.
Net interest margin expanded 10 basis points on a GAAP basis from the prior quarter and expanded 11 basis points on a core basis excluding accretion.
Slide 10 highlights our high quality deposit base and diversified funding profile for the current cycle to date, our beta on total cost of deposits was 17% as we have noted we expect deposit rates to continue to trend higher from here over the course of the rate cycle overall.
Our beta continues to track to our expectations turn.
Turning to slide 11 throughout 2022 we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedging program to manage possible downside rate risks over the longer term during the quarter, we executed a net $3.2 billion.
Of receive fixed swaps and $800 million of forward, starting swaps and collars.
At this point based on the current rate outlook and yield curve opportunities. We believe we have optimized the size of the program. We are comfortable with our position today as we balance near term costs versus longer term protection.
As always we will be dynamic as we monitor the outlook and the yield curve.
We maintain unused hedge capacity that we could deploy should the curve revert indoor steepen to a level, where we would add incremental downside rate protection hedges.
On the Securities portfolio, we saw another step up in reported yields quarter over quarter, we are benefiting from reinvestment as well as the hedge strategy to protect capital. We will continue to reinvest cash flows of approximately $1 billion each quarter at attractive new purchase yields around 5%.
Moving to slide 12, noninterest income was $499 million up $1 million from last quarter.
We drove record activity within our capital markets businesses during the quarter and throughout 2020 to capstone continued to perform well and our underlying capital markets businesses outside of Capstone finished the year strong up 26% year over year, we remain pleased with the client engagement we are.
Seeing in the wealth management business with another positive quarter of net asset flows on a year over year basis, we saw lower mortgage banking income as a result of the higher rate environment and from lower deposit service charges from fair play enhancements, we implemented during 2022 offsetting these factors.
<unk> or higher capital markets revenues and payments revenues importantly, we're executing on our strategy to drive higher value revenue streams, and our Phoenix continues to trend favorably.
Moving onto slide 13, GAAP noninterest expense increased $24 million compared to the prior quarter. Adjusted for notable items core expenses increased by $19 million. This quarterly increase in core expenses was primarily the result of revenue driven compensation tied to capital markets production.
Additionally, we saw seasonally higher medical claims in the quarter, which increased by $16 million underlying these results core expenses were well controlled demonstrating our commitment to disciplined expense management.
Slide 14, recaps, our capital position comp.
Common equity tier one increased to 9.44%.
Our tangible common equity ratio or TCE increased to 5.55% adjusting for a OCI. Our TCE ratio was seven 3%. We ended the year, having delivered on our plan to drive common equity tier one to the middle of our 9% to 10% operating range going.
Forward, our capital priorities have not changed.
Fund organic growth support our dividend and provide capacity for all other uses including share repurchases. After having held back on share repurchases for the last several quarters. Our expectation is that over the course of 2023 and beyond we will now return to a more normalized capital distribution.
Mix, including share repurchases, our board has authorized a $1 billion share repurchase program through the end of 'twenty 'twenty four give.
Given the current economic outlook, our thinking is that we will not actively repurchased shares during the first half of 2023 as we watch the path of the economy. This may result in capital ratios continuing to expand in the near term.
We like the flexibility of the program provides and we believe it is prudent to maintain an authorized share repurchase program as part of our overall capital management framework.
On slide 15 credit quality continues to perform very well as mentioned net charge offs were 17 basis points for the quarter. This.
This was higher than last quarter by two basis points and up five basis points from the prior year as credit performance continues to normalize nonperforming assets declined from the previous quarter and have reduced for six consecutive quarters criticized loans have similarly improved for four consecutive quarters allowance for credit losses was.
Up slightly driving the coverage ratio higher to 1.9% of total loans.
Turning to slide 16, you will note a strong reserve position.
As I mentioned the portfolio has continued to perform extraordinarily well and we believe our disciplined approach to credit through the cycle underpins. The overall strength of our balance sheet. We were pleased to update our medium term financial targets at Investor Day in November and these form the foundation of our expectations over our.
The planning Horizon. We believe these metrics are at the core of value creation profit growth return on capital and the commitment to drive positive annual operating leverage turning to slide 18, let me share some thoughts on our 2023 outlook.
As we discussed at Investor day, we analyze multiple potential economic scenarios to project financial performance and develop management action plans or targets are anchored on a baseline scenario that is informed by the consensus economic outlook and the forward yield curve as of December 31.
The baseline assumes a mild recession in 2020 three.
With modest net GDP growth for the full year the.
The economy is expected to exit the year on a path toward recovery with inflation gradually subsiding.
Since Investor day, the economic outlook is incrementally worse and is likely at the lower end of the baseline scenario outcomes. Our baseline outlook for 2023 is for average loans to grow between five and 7%.
Led by commercial with more modest growth in consumer we will continue to focus on optimizing for returns and driving loan expansion in select areas.
Deposits are expected to increase between one and 4%, reflecting continued growth and deepening of customer and primary bank relationships.
We expect continued robust performance from our areas of strategic focus capital markets payments and wealth management.
During 'twenty twenty-three several other factors are offsetting that growth, including our anticipated holding of the majority of our SBA loan production on sheet, thereby reducing near term fee revenue in favor of longer term high return spread revenue.
Lower income of approximately $23 million associated with purchase accounting accretion in fees. Please refer to slide 30 for more details.
Lower operating lease revenue as we continue to transition to more capital leases importantly, we expect this will result in lower operating lease depreciation expense as well.
Lower mortgage banking income for the full year 2023 versus 2022 and.
And finally in light of the economic outlook, we are implementing risk mitigating deposit policy changes that will result in a lower incidence of overdrafts and related service charges. In addition, we are reducing NSF fees to zero in the first quarter. This will result in an approximate $5 million.
<unk> and fee income per quarter, which we expect to be more than offset by lower associated charge offs.
As you know the first quarter is generally a seasonal low for overall fee income we expect fee income will grow sequentially throughout the remainder of the year.
On expenses as Steve noted, we intend to hold growth to a low level given the environment, even as we remain committed to funding critical long term investments.
We plan to manage core underlying expense growth between two and 4% for the full year. This level of expense growth benefits from the ongoing efficiency initiatives. We've discussed previously such as operation accelerate branch optimization and the organizational alignment actions that Steve highlighted.
Added to the core expense growth, we expect approximately $60 million higher expenses from the full year run rate of capstone in Toronto.
And $33 million of increased FDIC insurance expense associated with the surcharge. In addition, we expect the first half of the year to include some amount of restructuring charges associated with the expense management actions. We are taking we will provide more details about these actions later in the quarter.
Overall, our low expense growth coupled with expanded revenues is expected to support another year of positive operating leverage we expect net charge offs will be on the low end of our long term through the cycle range of 25 to 45 basis points.
Our 2023 guidance reflects the current macroeconomic outlook.
We will continue to be diligent and analyzing the macro environment and will react as needed to manage as the year plays out.
We ended 2022 in a position of strength and have good momentum we have every expectation of continuing to outperform this year.
With that we will conclude our prepared remarks and move to questions and answers Tim over to you.
Thank you operator, we will now take questions.
We ask that as a courtesy to your peers each person ask only one question and one related follow up and then if that person has additional questions he or she can add themselves back into the queue.
<unk>.
Thank you Josh your question at this time, you May press Star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Give me a fresh start to if you like to move to your question from the queue.
For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Sure.
Yeah.
Yeah.
Thank you.
Our first question is from the line of Maryann Mannen, Jimmy <unk> with Morgan Stanley . Please proceed with your question.
Hey, good morning.
Brian .
Hey.
Question on <unk>.
Deposit growth you've mentioned deposit competition has intensified.
Quite a bit and we can see from.
The CD rates that you're offering the market had been proactively raising the C D rich.
And all Frank Guy in a more 14 months Cds. So just just given all of that can you talk about how much of the projected deposit growth in 2023, it will be driven by C d's and what the overall deposit mix is likely to look like.
Sure This is Jack.
I'll take that question. Thank you.
We're asking in.
Generally speaking we're <unk>.
Seeing our deposit growth continue to trend pretty well in line with the outlook.
Yes.
Between one and 4% growth for the full year. So we think we're on that run rate.
Balanced between consumer and commercial and to your point will.
We'll continue to.
The mix of that deposit gathering continued to trend as we had.
And this is based upon overall beat.
Beat expectations for higher rate products like time deposits like money market.
Et cetera.
Beginning with <unk>.
Operating in this rate cycle.
Lower level of mix of those products and we work for example in the last rate cycle. So we'll see that trend higher throughout the course of the next several quarters.
And why.
Our general expectations and you know all comes back to our focus on deepening relationships with our existing customers.
Primary bank relationships.
He is working pretty well.
Two years ago I was 23.
Got it and then maybe on the on the NIM trajectory from here.
Your comment on if we're close to peak and given what you said on the hedges and the fact that he was through the program at least for now I mean, how should we think about a floor for NAND for me over the course of the next step.
Four to eight quarters, if the fat desktop cutting rates.
Yes.
Tom.
Sticking step back we've significantly benefited over the last three quarters smart explicit actions to manage the islands of managed assets sensitivity.
More than 60 basis points NIM expansions last three quarters alone.
That was very intentional with the mind towards continuing our top tier performance in NIM over the course of long periods of time.
As we see it now as you start to look into 'twenty three.
Do believe there's more room to go on asset base, we'll see yields continuing to increase over the next few quarters. However, we're further along in that process, probably three quarters of the way through and we are on the deposit beta side, but we also expect as we said.
We continue to track higher over the course of the next several quarters, probably only about halfway through the deposit.
And when you couple that dynamic with what is currently your expectation that yield curve that will see short end rates fall towards the latter part of 'twenty 'twenty four is reasonable to project is somewhat downward trajectory.
Over the course of 2023.
Our goal will be to manage the inventory as we've said.
The number of patients previously within his title corridor in 2023, as we can really protecting the downside without hedging program and ultimately driving toward sequential and sustained growth in interest income on a dollar basis I think when we couple that we started to be a pretty strong NIM level overall.
The loan growth we expect.
To drive again to the guidance, 5% to 7% over the course of this year, we'll see that NII on a dollar basis continued to expand.
Yes.
Great. Thank you.
Okay.
Our next question is from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Hey, good morning, everyone.
Yes.
Just sort of follow ups.
NIM expected to trend down given all of the hedges and protection you've put in place.
Titan.
Can you frame for us how much downside could we see what's the range.
Thank you for the question.
I think the trend is something on the order of single digit reduction all the kind of a quarterly basis as we go throughout 2023, there's a range of uncertainty. So I wanted to be clear not being overly precise you just think about all the factors that can play into that.
The fed funds options, which as you know from certain EBITDA plus are not aligned with the market expectations of how that all plays out.
The most important factor.
Pacer and trajectory of Veda, which at this point seems to be fairly well linear across time.
We can see how that goes and included.
One is the economy.
Where that where that tracks over the near term.
Similarly, too precise so I'm trying not to.
Break back to dollar our goal.
To drive NII on a dollar basis.
But I do expect some downward trajectory.
Probably something on the order of single digits.
On sequential basis each quarter.
That's helpful and then exactly when we look at.
Do you expect any more loan growth and deposit growth fairly large issuance of sub debt. This quarter could you walk us through the funding strategy. I know you said you expect overall growth in average earning assets.
What's the funding strategy. It seems like you have to do much more than just on the deposit side and maybe what will be the cost of that thanks.
No.
It's an important point and you know something that we feel that as a point of strength.
At this point in the cycle given that we're coming to.
The early since the middle stages of the cycle is still very advantageous overall position in terms of loan to deposit ratio.
Next.
Categories of deposit by time deposits in our non customer funding.
Relative to history. So it allows us.
Okay.
Previous occasions to utilize our balance was.
If you.
Look back at what happened in 2022, who loves it.
<unk> deposits for more than two 5% range clearly loan deposit ratios.
And we use a broad range of other funding sources.
Long term debt.
Yes.
And other non customer sources to balance out the same is going to be true for 2023, albeit with somewhat less less degree thinking about loan growth.
Mid to high single digits range five to seven.
Deposit growth in the one four doesn't fly.
The loan to deposit ratio tick up in and Youll see us therefore continue to utilize other balanced funding sources like <unk>.
Our home loan bank.
Now, they're not customer sources of funding there.
The rates that we're seeing are.
Pretty reasonable all of the incremental economics that logo continued very accretive to return on capital.
And the overall cost of deposits.
Funding within that.
NIM expectation.
Got it.
Got it thanks for taking my questions. Thank you.
Our next question is from the line of Ken Houston with Jefferies. Please proceed with your question.
Hey, Good morning, Hey, Jack I wanted to ask you I know we've talked about this last quarter. The security swaps that you had added a nice amount of net interest income again and I'm. Just wondering can you help us understand that.
Just you know the benefit from that you know if if and effectiveness helped that again and just how does that go like well how do we track that going forward relative to just.
Interest rates in terms of the benefits that you should get from there.
Yeah.
They were a very powerful.
Yes.
Protected as you know about a third or otherwise been a OCR embark reduction which was the primary attention virtually but also played out in terms of really strong yields in the securities portfolio roughly half.
Of the approximately 50 bps increase in securities yields was from that hedging program to give you a sense of the scale.
Where it goes from here in terms of incremental benefit is going to be some group awesome.
Where that.
Mid portion of the curve goes this way it's fairly well.
Yes.
More of a lift there.
From that has.
Reduced somewhat from the third quarter, but still very accretive.
Adding to that portfolio now.
And so I think.
We're getting the benefit.
Thank you.
Okay, Great and then one follow up on deposit beta 17% total cumulative so far through the cycle can you just remind us what youre thinking.
About betas from here and just be Super clear for US If you don't mind on the I think you guys usually do talk on total yes sure. So it was 17 to give you a status tracking across time. It was 6% in Q2, 11% Q3, 17% in Q4, so continues to.
Tracking and kind of an additional five to six to seven.
Per cent range, each quarter and the expectation as we go out to Q1, it could be some more of the same continuing out over it until we get to the.
The middle part of the year, our planning assumption Ken is something on the order of 35% total.
Through the cycle.
Indicate we're about halfway through to the higher point that I made.
With that being said I will tell you where we are.
We're intently focused on the day to day management.
Really very very rigorous looking client by client in the commercial portfolio geography by geography.
In the consumer portfolio and ensuring that we can stay competitive and ensure we've got a strong deposit franchise and so.
We will continue to tweak and see image against that.
The outlook changes, we'll let you know this is attractive for you that prior expectation.
Okay, great. Thank you Jack.
Yes.
Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.
Hi, good morning.
Good morning.
You mentioned on Slide 18, you expect to be at the low end of your net charge off range.
You know the tone very quickly changed from some random for hard landing I guess my question. Here is this may be obvious to us that have covered the company for a while but.
What what makes you confident despite the deteriorating economic outlook that you could still at the low end of that already pretty low range and given some.
I wouldn't call them up here, but there is a company that reported pretty eye popping delinquency numbers in auto. This morning, I'm wondering if you could give us what's going on with auto.
Auto credit trends underneath and again, we remind us why you feel confident about how that portfolio is performing.
On the downturn.
Yeah, Rich I'll, let me take that I'll go and I'll answer your second question first with respect to auto So we are seeing.
Delinquencies in our portfolio and again remember this is a prime and Super Prime.
Portfolios, we talked about at Investor day.
You know we've been in this business for decades is that fair.
Very sophisticated custom scorecards that we use on our client selection process.
We feel very good about where this business is today.
Our cycles and has proven itself that can outperform peers from a lost content through various cycles. We feel good about that the delinquencies right now we're right, where we would expect them to be.
The seasonal standpoint.
If you go back and you look at where delinquencies.
2018 in 2019 area, we're still trending below those pre COVID-19 levels.
We feel good there and we've been very proactive as it relates to.
However, managed.
To use that space.
As well so.
Have any real concerns about our indirect auto space I feel very comfortable with how that business is run.
With respect to the overall comfort that we have.
Net charge off forecast.
I think it goes back to our customer.
I talked about at Investor day on the consumer side, we are overwhelmingly of securities.
95% of our loans are secured and again, we've got that kind of.
<unk>.
And high FICO origination.
So it is a very strong book and through all of that bucket.
About auto.
But even RV marine rescue all of those portfolios are showing very well.
So we feel good there.
On the commercial side, we have taken a lot of steps to reposition this book over the last several years going through into more specialty businesses more larger companies.
Public companies, so we feel that we mitigated the loss content.
Portfolio as well so even though.
<unk> pointed out where we're looking at more of a mild recession.
So.
That's why we felt comfortable with where we are from a charge off forecast low and now clearly.
Economy worsens.
We land within that range.
The economy goes.
Thanks.
This point, we're comfortable with where we put that guidance.
Eric This is Steve.
The guidance is through the cycle and we've been well below the through the cycle average.
At this point, we're guiding to.
The lowest end.
<unk>.
With the strategic on how we position.
The lending activities.
A dozen years.
Been very disciplined rich and team along with the lending teams.
Adhere to that discipline.
Didn't open up in some of the areas like the throat frothy.
In recent vintages.
So we've got a really good core book on both the commercial side.
As a super Prime and secured leverage generally both the consumer side, we actually think of that as a lower risk more so.
Aggregate volumes of low risk profile and discipline over many years.
US well certainly follow.
And frankly the entire portfolio.
Thank you for that and my second question is.
You know on that 6% to 9% keeping our gross medium term target you know clearly you expect to hit that this year.
And I'm wondering you know obviously.
That's more difficult that is.
Cutting which a lot of investors expect for 2024 and maybe the question is I know, we'll hear more from you on the expense management actions that you're taking for which you will incur a restructuring charge.
An example of it.
Huntington has to deliver this pea PNR growth range.
Consistent with our medium term on an annual basis basis, even if their revenue tailwind.
Like right.
Erika this is zach.
Ill take that one and the answer to your question is yes, we are.
Sure.
In terms of.
That very much is a sign of our trying to look at look at not only 2023, but also over the entirety of the strategic planning horizon and assure that we're setting up the overall financial performance in terms of revenue and the growth rate of overall expenses such that we can achieve the objectives in terms of.
Very deeply held objective.
We're not in the short term, but the long term to achieve it.
As we talked about on Investor day.
Multiple strategic levers that we use to manage overall expenses to grow less than revenue to support that.
Even as we drive a faster.
<unk> expenses certain investments within it within expenses to drive.
Ultimately business for the long term.
<unk> drivers operation accelerate.
Major customer facing processes.
Cost of the system.
Productivity.
Our long track record of optimizing.
The consumer to result were introduced distribution network, which is still very relevant to all of that in this way.
It does represent an opportunity over time to reduce it.
Harvest expense saves energy.
And things like this organizational alignment and mature.
Designed to help us to improve efficiency.
And and hold costs.
I will note in the guidance given in terms of overall courses for 'twenty three but importantly, also helps us to achieve our strategic objectives.
Align our organization.
Even more towards our most important strategic priorities.
Operator.
Sufficient weekend.
In pesos.
Paces as we can so.
We are extremely focused on driving.
Long term efficiency program, which is an important component.
Thank you Rebecca.
Potential.
That's what was baked into it.
Yeah.
Yes.
Steve if I could add on that.
As you'll remember from the Investor day.
Sure a number of economic scenarios.
And we were asked a question and commented that we will take actions at the scenarios.
As the economy.
Worse than.
The more challenging scenario.
Already closed.
32 branches.
We are taking actions consistent with our prior statements and the commitment.
Driving towards these medium term financial goals, we're looking ahead as well so 24.
With how we're positioning the reinvestment of these actions.
Teams doing a great job at sprint pivot if you will.
Well from a record year and record quarter.
But it's with a very clear.
Set of actions.
And planar.
Execute.
Thank you.
Good question.
The next question is from the line of Jon <unk> with RBC capital markets. Please proceed with your question Hey, Thanks, Good morning, everyone.
Just a follow up on America's first question.
You guys talked about your buyback being on pause because you're watching the path of the economy in the first half you talked a little bit about.
The economic outlook since your Investor day was slightly worse, yet rich you sound pretty confident.
Feels like you feel good about your credit outlook.
Help us square that a little bit more you actually seen erosion, maybe outside of your portfolios or help us understand your overall thinking because it seems like it's pretty positive from my view.
I would say it's positive right now.
Certainly cautiously.
Gotcha.
I'm looking at right now John is holding water exactly where we thought it would be.
Let's see.
Both in commercial and consumer are right, where we are.
I would expect us to be a very.
Sharp drop in.
Commercial delinquencies.
Herschel real estate.
Essentially nothing.
<unk> momentum.
NPA momentum that we've got both down 20% year over year puts us in the releases.
Sure.
So we're looking at.
Every day.
In every portfolio.
Just to make sure that we're proactive in identifying.
Potential issues and trying to get it has done in terms of working with customers.
Potential problems.
Certainly the headwinds are there in the economy, but we feel good about where the portfolio is positioned like.
So we're not going to that we do.
Higher losses forecasted in 'twenty three.
So we understand some of the more challenging environment, but we feel good where we're sitting.
Okay.
And then can you guys touch on the one fee line that stood out was capital markets can you touch on what you're seeing there.
You talked about Capstone and then some of your other businesses are these referrals coming to capstone internally.
Is it business generated on their own and what's what do you. What do you think they are in terms of the longer term runway. Thanks.
And in terms of assess exactly Josh I'll take that one.
Capital markets is a real bright spot for us.
The core underlying capital markets, excluding capstone grew 26% revenue year over year in 2022, and we expect another run rate of double digits.
Teens or above revenue growth as we go into <unk>.
Three so we're seeing really sustained traction for the underlying strategy there is cheap.
No.
Deepen relationships.
With additional clients.
Penetrate.
<unk> services and products into our core customer base.
Reap the benefits of it.
It's been an area as it goes.
Bessie considerably over time, and we're seeing that.
Sure.
Road growth and then capstone to your point.
It's a nice addition to that and I would tell you that the capstone is doing really well.
The plan for <unk> for Q3.
Overall.
More than $100 million run rate in the back half of revenues in the back half of 'twenty, two and we expect that to continue.
<unk> seen growth going into 'twenty three it's early days I would say in getting client.
Referrals from the Huntington base, but as we get we are.
Particularly as the richness of the.
Pipeline.
The future a lot of positive engagement.
Huntington clients with the capstone.
Team with.
With the service out there so.
It's going to be an area that just continues to bear fruit and we're quite bullish about the opportunity to grow capstone as what it was previously 100 billion revenue run rate.
<unk> continues to perform well.
As we go forward over time.
It's definitely a strong.
Add to that a little bit John if I can suggest us had a good performance thus far.
Very strong pipeline coming into the year.
Obviously multiples have changed valuation is impacted by the timing becomes a little more.
Uncertain, but but.
We're really pleased with that and the integration into the bank channels is going very very well.
Core business is foreign exchange a record year.
Social sales and trading.
Commodities is.
<unk> had very good proposal number of the businesses are doing very very well.
Sure.
They will continue.
So the laggard is as you would expect the rates businesses.
Given given the inverted curve.
But this is an area of strategic growth investments and an investment in.
The integration of Capstone.
Combined.
The efforts of our core teams, which earned disputes at the Investor day.
So very bullish about that.
'twenty three and beyond.
Okay. Thank you. Thank you John .
The next question is from the line of Scott She fish with Piper Sandler. Please proceed with your question.
Good morning, guys.
I just wanted to Hey, I just wanted to ask one back on credit just sort of in light of your updated economic assumptions, what what sort of additional reserving needs do you think Huntington might have an ear already starting with 190 plus reserve here. So I mean that seems sufficient in light of what youre thinking or would it continue to drift upward a bit.
Hey, Scott.
I'll take that so as you so.
So we've held our coverage levels flat in the second quarter and then we have two incremental builds in Q3 and Q4. So the 190 coverage that were that were sitting with today, we think it's fully reflective of the current economic scenario.
Where are the reserve goes from there is really a function in the short term bridge economy study.
We see significant degradation.
We react to that or.
Businesses will react there so.
It's hard to answer it we go through that process every quarter in terms of looking at the economic scenarios in front of us.
What's the potential for improvement.
Yeah.
No.
Our cost base.
Based on all that.
In the near term is really noteworthy Tommy shakes out I would say that no longer term as we just passed.
However.
We do think that we will bring that reserve coverage down.
Overtime.
Just a question.
And the year end.
<unk> reflects this.
Just thinking in terms of the baseline economic scenario.
Yep.
Sure.
Thank you and then that started to take that question just the expense guidance for the full year I'm presuming that includes the restructuring charges to which new alluded earlier.
You said, you're talking more and more detail about those later, but do you have maybe an approximate level of what we might expect us to get a sense for what sort of underlying expense growth might look like from here on out yeah. Thanks, Scott for for asking questions.
Just to clarify.
The guys have given us 2% to 4% growth in underlying core and on top of that.
Run rate for Capstone Suraj is around 60 million plus the FDIC surcharge.
Yes.
$3 million.
We have not yet fully sized.
Potential restructuring costs from the organizational alignment actions, Steve mentioned, so that is yet to be used.
That guidance.
To put a very specific point on that.
So I don't expect it to be overly large, but we'll have to see ultimately it'll be a function.
Of a number of factors, including <unk>.
The nature of the changes and importantly, as Steve noted.
A voluntary retirement program, which.
<unk>.
It has a functional of import.
<unk> selection of take up on their own so it'll be some degree of.
Variability until you have a sense of where that program.
So more to come on that there's a few opportunities during the first quarter for us to provide additional updates around the nature of the program to the sizing right.
As we get further out.
Perfect. Okay I appreciate it.
Okay.
There is some pick up on that expense.
That one time expense.
We can do to.
Also in our forecast.
Okay perfect. Thank you all very much.
The next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Good morning, I, just wanted to push on the buybacks you've got almost 95% CET one capital you've got very strong reserves he got very strong.
Our capital generation solid loan growth, but not going to consume a ton of capital it seemed pretty confidant on credit.
I guess I'm, just trying to better understand why you wouldn't buy back stock in the first half.
Yeah, just kind of throw it out there it feels like the uncertainty might increase as they look to the back half.
So what would make you kind of more content to buyback in the second half.
You know heading into maybe more macro uncertainty.
Yes, it's.
Good question.
Taking a step back broadly to frame it.
The expectation now is because we get out over the course of the totality of 'twenty three and certainly as we think about 'twenty four and beyond to get back to a more normal mix overall payout ratios three dividend.
<unk> purchases.
Cheney capital to grow.
You can see this buyback as well.
<unk> program with the repurchase program.
Indicative of that part of that and I think it's really healthy.
Assignments.
Let me talk a little more tactically zooming in into the near term.
Really want to see.
The depth of the economic environment during the course of 'twenty, three before making any substantive or significant commitment.
Over the lawsuit.
Yes.
Your stuff.
How long exactly does it take to get clear age. It's your point is somewhat uncertain, but I suspect we will know a bit more over the course of Q1 and as we get into Q2.
<unk>.
It's more resolved at that point then.
More active is still highly uncertain.
And the dynamic.
But generally speaking the size of the program was.
It was designed to keep us in the middle of our CET, one operating range over the course of.
Okay preceding periods and so that'll be our plans are to generally manage in that way.
Okay.
Sure.
Okay, and then you know as.
As we think about potential uses of the capital. Besides buybacks just remind us your appetite for bolt on deals and I guess, specifically with and he is right because we kind of step back right now in noninterest income.
Maybe it's not peaking but it's probably not going to be a key driver of growth.
As we get through this year and beyond.
I know you guys have been talking about kind of better balancing Phoenix every time, so what's the appetite to do something whether it's small or maybe bigger than you've done in the past. Thank you.
Steve.
We are interested in building out our fee income opportunities in that revenue stream is.
And so if we can find things that we think makes sense.
Enhance R R.
In terms of business lines.
<unk> will be helpful to our customers.
Be interested.
Just as last year, which sounds good capstone.
Fintech.
Okay.
So.
We'll be looking at the year as the year progresses.
Whether it makes sense to bolster the acquisition on the fee side all of our businesses.
Yes.
That's.
That's not sort of an attendant set aside.
Buybacks.
Just related.
<unk>.
Our capital priorities haven't changed.
Okay. Thank you very much.
Thank you.
At this time, if we change the question and answer session I will now turn the floor back to Mr. Steiner for closing remarks.
Thank you very much for joining us today as you know, we're very pleased with a record year for Huntington.
Straight quarter of record net income fourth straight quarter of <unk>.
No.
They did this year with a lot of momentum, we think we're well positioned to manage through a mild recession and we remain committed to our ability to continue creating value for shareholders and as a reminder, the ore executives. Our colleagues are a top 10 shareholder collectively reflecting our strong alignment.
While I'm on that with our shareholders. So thank you for your support and interest in having said have a great day.
This concludes today's conference you may disconnect at this time and thank you for your participation.