Q3 2024 Huntington Bancshares Inc Earnings Call
Speaker Change: Greetings and welcome to the Huntington Bank shares 24-3rd quarter earnings review. At the time, participants will be in the list of not only mode. The question and answer session will follow the formal presentation.
Speaker Change: If anyone should acquire operator assistance during the conference, please press star 0 from your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: I would now let you turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead.
Tim Sedabres: Thank you operator, welcome everyone and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.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 Steinour, Chairman, President and CEO , and Zach Wasserman Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A. Thank you very much.
Tim Sedabres: Earnings documents which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website. 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 report outstanding results for the third quarter, which Zach will detail later. Thank you very much.
Tim Sedabres: 24 continues to be a dynamic year and our year-to-date results demonstrate Huntington's strength and consistent performance. These strong results reflect the dedication of our nearly 20,000 colleagues across the bank who live our purpose every day as we make people's lives better, help businesses thrive and strengthen the communities we serve.
Tim Sedabres: Now on Decide 4, there are 5 key messages we want to share with you today. First,
Tim Sedabres: We are driving accelerated long growth, along with sustained deposit growth.
Tim Sedabres: These results are supported by our core businesses.
Tim Sedabres: as well as the successful execution of new initiatives, including expanded geographies and commercial banking verticals.
Tim Sedabres: Second, we are actively executing our down beta playbook as the market enters a declining fed-rate cycle.
Tim Sedabres: We are dynamically managing the balance sheet and coupled with our growth outlook, we expect to deliver record net interest income in 2025. Third, we continue to drive the revenue higher with sustained momentum across our three major focus areas.
Tim Sedabres: Payments, wealth management and capital markets. Fourth, our credit performance remains stronger in the quarter with stable net charge off as well as lower non-performing and criticized assets.
Tim Sedabres: This is a direct result of our consistent, disciplined credit management and our aggregate moderate to low risk appetite.
Tim Sedabres: Finally, our performance during the quarter set the foundation for continued organic growth and increased profitability into 2025 and beyond.
Tim Sedabres: I will move us on to slide five to recap our performance. We delivered accelerated along growth in the quarter with average balance is growing by 3% from a year ago and a period loans increased at a 6.3% annualized rate.
Tim Sedabres: Average Deposit Growth continued at a robust pace increasing by $8.3 billion or 5.6% over the past year. We drove capital ratios higher again with adjusted common equity tier 1 of $8.9%.
Tim Sedabres: This benefited both from capital accretion from earnings, as well as reduced AOCI.
Tim Sedabres: Our fee revenue strategies are delivering with gap fee income increasing by 3% year-over-year.
Tim Sedabres: On an adjusted basis, Corp. Revenant's demonstrated robust growth, increasing by 12% from a year ago, driven by payments, wealth management and capital markets.
Tim Sedabres: We are sustaining momentum in the growth of primary bank customer relationships.
Tim Sedabres: As we continue to acquire new customers across the footprint, consumer PBRs have increased by 2% and business banking PBRs have increased by 4% year over year.
Tim Sedabres: We have delivered PBR growth consistently with year-over-year increases.
Tim Sedabres: for over a dozen consecutive quarters.
Tim Sedabres: We have continued to invest across the company to drive sustained organic growth. Last month we were pleased to announce our full franchise and branch expansion into the Carolinas.
Tim Sedabres: This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year.
Tim Sedabres: These markets represent some of the most attractive geographies nationally given their size and growth characteristics.
Tim Sedabres: We've hired well-established colleagues with local expertise in these markets and the results today are tracking much better than our initial business case.
Tim Sedabres: We've also invested substantially in our payments businesses, particularly in Treasury Management, including bringing in-house our merchant acquiring capabilities.
Tim Sedabres: The merchant acquiring business completed its final testing phase in September and implemented its full commercial launch in early October.
Tim Sedabres: The opportunity within merchant is substantial.
Tim Sedabres: and when at scale, we expect to add one percentage point.
Tim Sedabres: to overall fee revenue growth. Credit trends overall are holding up very well, supported by our long track record of disciplined client selection. Our consumer portfolios are constructed around prime and super prime exposures within these portfolios, consumer delinquency rates remain stable. We are continuing to see sound fundamentals from our commercial customers. They have managed this rate cycle and inflationary change as well with stable revenue and profitability trends.
Tim Sedabres: Overall, our customers continue to show strength and resiliency, which supports a constructive outlook for sustained organic growth.
Tim Sedabres: We exited the third quarter with robust production levels in September and with momentum that is carried into the fourth quarter.
Tim Sedabres: As an example, our regional banking group posted record loan production XPPP in the third quarter.
Tim Sedabres: Heading into the fourth quarter, late stage commercial pipelines at quarter end.
Tim Sedabres: are up 68% from a year ago.
Tim Sedabres: Our teams are actively implementing our down beta action plans.
Tim Sedabres: The revenue growth was robust in the third quarter, and we have confidence in our many initiatives including merchant acquiring, as well as the outlook for capital markets and advisory revenues given strong pipelines as we enter the fourth quarter.
Tim Sedabres: We are maintaining disciplined expense management while continuing to invest.
Tim Sedabres: The additional efficiency actions we took in the third quarter will support our ability to sustain investment and to revenue producing initiatives into 2025.
Tim Sedabres: Credit remains a hallmark of Huntington with stable charge-offs and improved non-performing and criticized assets.
Tim Sedabres: In closing, we have confidence in our ability to sustain our organic growth outlook as we finish the year and move into 2025.
Speaker Change: Zach, over to you to provide more detail on our financial performance.
Zach: Thanks to even Good Morning, everyone!
Zach: Slide 6 provides highlights of our third quarter results.
Zach: We reported it earnings per common share of 33 cents.
Zach: The quarter included $6 million of notable items on net basis and did not have an impact to earnings per share.
Zach: Return on tangible common equity or ROTCE.
Zach: came in at 16.2% for the quarter. Adjusted for notable items, ROTCE was 16.3% Pre-Pervision Net Revenue, or PPNR, increased by 8.3% from the prior quarter. This was driven by net interest income, which expanded by 2.9% and fee revenues, which increased by 6.5% from the prior quarter. Average loan balances increased by $3.7 billion, or 3.1% versus last year. Average deposits continued to grow, increasing by $8.3 billion or 5.6% on a year-over-year basis.
Zach: Credit Quality remains strong.
Zach: with net charge off of 30 basis points.
Zach: Allowance for credit losses decreased by two basis points and ended the quarter at 1.93%.
Zach: Adjusted C-E-T-1, and is the quarter at 8.9%.
Zach: and increased roughly 30 basis points from last quarter.
Zach: Supported by earnings, as well as the recapture of AOCI from lower rates.
Zach: Tanja will book value for share as increased by 21.5% year-rear.
Zach: Turning to slide seven.
Zach: Consistent with our plan and prior guidance.
Speaker Change: Year-of-year average loan growth is accelerating. Q3 loan growth was 3.1% year-over-year, rising from last quarter's 1.7% growth and the 1.3% we posted in Q1. Average loan balances increased sequentially by $1.1 billion, excluding runoff from commercial real estate loans increased by $1.6 billion or 1.3%. As Steve mentioned, end-of-period loans increased by 1.6% and represented a 6.3% annualized growth rate.
Speaker Change: Lone Growth in the Quarter was supported by strong contributions from core businesses and from new initiatives. Our new initiatives collectively represented $700 million of growth in the quarter, and included Carolinas, Texas fund finance, healthcare asset based lending, and Native American financial services. Note this pace of growth was above the second quarter level, as teams continue to ramp up, and we expect growth in the fourth quarter to be further above these levels.
Speaker Change: Other drivers of loan growth in the third quarter included $595 million from consumer auto, $268 million from regional banking, $165 million from residential mortgage, $137 million from auto floor plan, $80 million from RV Marine, $131 million from all other consumer categories on a net basis, and $109 million from all other commercial categories on a net basis.
Speaker Change: This growth was partially offset by seasonal decline in distribution finance, which was lower by $747 million.
Speaker Change: Generally, we see the third quarter as the season on low point in the year for this business.
Speaker Change: Given inventory levels across our mix of programs.
Speaker Change: We expect inventories to build into the fourth quarter and resulting balances to be higher in the fourth quarter on average compared to the third quarter.
Speaker Change: Turn to slide eight. As noted, we drove another quarter of solid deposit growth.
Speaker Change: Average Deposits Increased by $2.9 billion or 1.9% in the third quarter.
Speaker Change: On a full quarter basis, total cost of deposits increased by two basis points in the third quarter.
Speaker Change: and interspereying deposit costs were flat for the quarter.
Speaker Change: With in the quarter, there were notable declines in the Pazikost.
Speaker Change: We saw total cost of deposits declined sequentially in both August and September with September costs lower by 7 basis points.
Speaker Change: This is a direct result of our proactive and disciplined execution of our down beta action plans, in advance of the Fed's 50 basis point rate cut in September and continuing into Q4.
Speaker Change: These actions reflect our active balancing of deposit volumes and rate.
Speaker Change: Given our robust deposit growth over the past year, we're in a strong position to optimize rates from here.
Speaker Change: We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves.
Speaker Change: Our forecast is aligned with a Ford curve which projects two additional 25 basis point rate cuts by year end and a further five 25 basis point rate cuts in 2025.
Speaker Change: As we noted in the past several quarters related to guidance on Upbeta.
Speaker Change: The Performance Interjectory of Down Beta will be a function of the actual and projected path of rates.
Speaker Change: and Importantly, Customer Expectations for that path.
Speaker Change: Based on the current rate outlook.
Speaker Change: We continue to project a cumulative down beta in the mid to high 30s by the fourth quarter of 2025.
Speaker Change: and in the mid 40s range by the 4th quarter of 26.
Speaker Change: Turn this slide nine. Our cumulative deposit growth since early 2023, totaled 7.1%.
Speaker Change: This level continues to well outpace the peer group.
Speaker Change: As a result, we've been able to decisively implement the downbed of strategy, fund loan growth with the posits.
Speaker Change: and at the same time, minutes the loan to deposit ratio lower over the past year.
Speaker Change: which will support the continued acceleration of lending.
Speaker Change: on this slide 10.
Speaker Change: For the quarter, net interest income increased by $39 million or 2.9% to $164 million.
Speaker Change: We delivered sustained growth off of the trough levels from the first quarter of this year.
Speaker Change: Consistent with our guidance.
Speaker Change: Net interest margin was 2.98% for the third quarter. Reconciling the change in NIM from Q2, we saw a decrease of one basis point.
Speaker Change: This was due to spread, net of free funds, lower by two basis points, higher cash balances driving margin lower by two basis points, partially offset by lower drag from the hedging program which improved by three basis points. We continue to project full year net interest income to be within our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year over your basis, and then resume growth over the first half of 2020. This is expected to result in record net interest income for 2025 based on current rate curve expectations.
Speaker Change: We continue to benefit from fixed rate loan repricing with loan yields expanding my four basis points from the prior quarter. This occurred even as sofa moved lower during the quarter.
Speaker Change: As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios, for both short-term rates, as well as the slope and belly of the curve. As I noted earlier, our working assumption includes two additional rate cuts by year end and a further five cuts in 2025, and underlies this then-interest income outlook.
Speaker Change: Turned this light 11, our level of cash and securities increased, as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percentage of total average assets to remain in approximately 28% at the balance she grows over time.
Speaker Change: We are reinvesting securities cash flows in treasuries, and expect to manage the un-heds duration of the portfolio at approximately the current range. We have increased the average duration of new securities purchases from very short half-year duration to slightly longer to three-year durations, which is a component of our strategy to systematically reduce asset sensitivity over the next several quarters.
Speaker Change: Turning to slide 12. Over the course of the rate cycle, we've positioned the company to benefit from assets sensitivity as the rate environment moved higher, and are now reducing our level of assets sensitivity as market expectations are increasingly weighted toward a downrate path. That strategy has worked well to maximize the benefit from the rate cycle and protect capital, while managing them with a tight corridor.
Speaker Change: On the bottom of the slide, there is an illustration of the asset sensitivity path over the next several quarters.
Speaker Change: In Q3, we lowered our asset sensitivity by more than one-third from the second quarter.
Speaker Change: Looking forward, we expect the total cumulative reduction in asset sensitivity from Q2 to be greater than 50% by year and 2024 and moving to above 60% by mid 2025.
Speaker Change: As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization.
Speaker Change: Moving on to slide 13.
Speaker Change: On an overall level, Gap, non-interest income, increased by $32 million to $523 million for the third quarter.
Speaker Change: Adjusting for the impacts of CRT transactions and the pay-fix swapsions marked a market from the prior year.
Speaker Change: Fee Revenue is increased by $55 million or 12%.
Speaker Change: on a core underlying basis.
Speaker Change: Moving on to slide 14.
Speaker Change: Our strategy to increase the penetration and usage of value out of fee services is building on momentum we've created over the last several years.
Speaker Change: A justed fee revenues as a percentage of total revenues.
Speaker Change: Having increased from 25% a year ago to 28% in Q3.
Speaker Change: This reflects the focused effort on key initiatives across payments, wealth management, and capital markets.
Speaker Change: Within Payments
Speaker Change: Revenues have increased by $4 million in the third quarter, and have increased by $6 million year-over-year Commercial Payments Revenues, including Treasury Management fees, have grown strongly, increasing by 8% from the prior year. Debit Card Revenue grew by 3% year-over-year, reflecting performance higher than industry averages yet clearly impacted by the relatively slower levels of consumer spending growth we are seeing economy wide. Other Card-based revenues continue to grow year-over-year, supported by consumer credit card spending trends.
Speaker Change: The addition of merchant acquiring in house capabilities will further support our overall payments revenue growth as we enter the fourth quarter and carry into 2025. As Steve noted earlier, we see this initiative adding approximately one percentage point to overall fee revenue growth next year.
Speaker Change: Within wealth management, revenue growth was outstanding, increasing 18% from the prior year. Advisory relationships have increased by 7% over year, and assets under management have increased 22% on a year over your basis.
Speaker Change: These results benefited from sustained positive net asset flows. Within capital markets, we saw exceptionally strong revenue growth, increasing by $26 million or 50% from the prior year to $78 million. These results were driven by commercial banking-related capital markets revenues, which are accelerating as we have previously guided as a result of higher commercial loan production.
Speaker Change: As we look out into Q4, we expect to post another quarter of sequential growth in capital markets, driven by continued underlying core banking related services and a robust advisory pipeline. We expect this positive momentum to carry into 2025.
Speaker Change: Moving on to slide 15 on expenses.
Speaker Change: Gap non-interest expense increased by $13 million and underlying core expenses also increased by $13 million.
Speaker Change: During the quarter, we incurred $13 million of expenses related to efficiency programs, which will benefit our 2025 expense outlook and allow us to reinvest savings into key revenue producing initiatives.
Speaker Change: Additionally, this was partially offset by a $7 million benefit from the FDIC special assessment. Net, notable items for the quarter totaled $6 million. Excluding these items, core expenses came in slightly better than our expectations for the quarter, at $1,124 million.
Speaker Change: The increase in core expenses quarter over quarter was primarily driven by personnel expenses due to higher salaries and benefit costs. We also saw $3 million of higher expenses related to merchant acquiring, as we brought that business in-house and launched our services in October .
Speaker Change: We continue to forecast approximately four and a half percent core expense growth for the full year.
Speaker Change: Slide 16 recaps our capital position. Common equity tier 1 ended the quarter at 10.4%. Our adjusted CT1 ratio, inclusive of AOCI, was 8.9% and has grown 90 basis points from a year ago. Our capital management strategy remains focused on driving capital ratios higher while maintaining our top priority to fund high return loan growth. We intend to drive adjusted to CT1, inclusive of AOCI, into our operating range of 9 to 10%. On slide 17, credit quality is coming in as we expect it and continues to perform very well.
Speaker Change: Net Chargers were 30 basis points in Q3, relatively stable over the past four quarters, allowance for credit losses at 1.93%, declined by two basis points from the prior quarter, and reflects both modestly improved economic outlook as well as an increased loan portfolio. On slide 18, the criticized asset ratio decreased by 9% from the prior quarter to 4.09%. The non-performing asset ratio declined by one basis point to 62 basis points.
Speaker Change: Turn to slide 19. Our outlook for the full year remains unchanged from our prior guidance. Our expectations for the fourth quarter include accelerating loan growth at approximately 4% to 5% on a year of your basis.
Speaker Change: Deposit Growth is expected to increase between 4 and 5% on a year of your basis.
Speaker Change: We see full-year net interest income unchanged from our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year-over-year basis, and then resume growth in the first half of 2025 and accelerating in the second half. Core fee revenues adjusted for the swapsions and CRT items are expected to grow at approximately 8-9% year-over-year in the fourth quarter. The fifth quarter level is expected to be flat to up 1% on a year-over-year basis, and then resume growth in the fourth quarter.
Speaker Change: Core expenses are well-managed and tracking to our full-year outlook. For the fourth quarter, we expect growth of approximately 3% year-over-year, subject to some variability given revenue-driven compensation levels, as well as expenses related to the insourcing of our merchant acquiring business, which brings with it direct offsetting fee revenues.
Speaker Change: Business Consistent with our previous commentary to exit the year at a low single digit year of a year expense growth rate.
Speaker Change: Credit is performing well, aligned with our expectations and net charge-offs are projected to be relatively similar to Q3.
Speaker Change: Our tax rate for the fourth quarter is likely to be between 18 and 19 percent. With that, we'll conclude our prepared remarks and move over to Q&A. Tim, over to you. Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person has 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. Thank you.
Speaker Change: Thank you. At this time we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad and a confirmation tone indicate your line is in the question queue.
Speaker Change: You may first start too if you like to withdraw your question from the queue.
Speaker Change: For participants that are using speaker equipment, maybe necessary to pick up your handset before pressing on the star keys.
Speaker Change: One will please will we pull for questions.
Speaker Change: Thank you and our first question is from the line of monon Gosalia with Morgan Stanley. Please just see with your questions.
Speaker Change: Hey, good morning.
Speaker Change: Wondering on.
Speaker Change: Good morning, so you know the guidance for 4Q and I think implies that and I should be flat as slightly down versus 3Q. Can you talk about what's driving that, you know, is that just timing difference between those floating red acid yields coming down and the deposit cost coming down?
Speaker Change: Thanks, Manan, this is Zach, I'll take that one. And the short answer is yes, just a short timing difference between the really powerful and very effective actions you've seen on reducing deposit costs, which you saw from the trends we've illustrated in the third quarter. Those will continue into the fourth quarter, just not fully offsetting a short-term basis, the reductions in variable yields. I think we'll exit Q4, having a positive run rate benefit from deposit costs relative to the asset yield, but the early part of the quarter. Assuming again two more rate cuts, which is our forecast here, we'll like to be a little lower, a quarter to quarter.
Speaker Change: Got it. And can you share more color on the deposit growth there? You know, it looks like you continue to grow deposits faster than loans this quarter. You know, is that mostly coming from New Account growth? And I guess the question there is why not pay down some of the higher cost CDs to help NII and have deposits grow a little bit slower than loans given that you pre-funded a lot of loan growth in the first half of the year?
Speaker Change: Yeah, it's a terrific question for me notting. That is effectively the plan. We really pleased to see how much a positive growth we've seen throughout the course of this year. I'm so you know.
Speaker Change: very significantly faster than the industry ever to overall. And that only puts us in a pretty strong position now with having brought down loan deposit ratio and just given how strong that deposit gathering has been to now turn and drive down beta and begin to decelerate deposit growth even as a loan growth is accelerating. So if you look at the guidance we've given for deposits into the fourth quarter, I would expect the balance is to be relatively flat actually quarter to quarter, even if they still grow year on year. And that's really an indication that we're doing exactly what's just set leveraging that position to really drive a funding cost lower.
Speaker Change: Our next question is from the line of Abraham Poonwallot with Bank of America. Let's just see what's your questions.
Abraham Poonwallot: He's a good morning. Do you want to drink? I do think one, I guess Zach is one to follow up. I think you mentioned, and I guess you have the guidance of Fort Quarra and then.
Abraham Poonwallot: Did you mean to say that the growth accelerated from the 1, the 4, 2 was a 3 kilo, and we think about first half 25, and then get even faster to the course of 25, if you just clarify that.
Speaker Change: With that, what's the sensitivity to rate cuts? Let me advise from retail sales to the markets actively recalibrating what the Fed may or may not do. Just talk to us whether getting three to four cuts versus not getting those cuts means much in terms of your and I outlook.
Speaker Change: Yeah, great question, Stephen, for the chance to unpack and clarify that.
Speaker Change: So, you know, our general expectations for men are to be a few basis points lower into the fourth quarter, really driven by what I was talking about from Manan's question earlier, just a short timing impact before which before accelerating beta, that's their stuff, fully offset and more than offset.
Speaker Change: the variable, you know, in fact some variable loss. I will note as well that one of the major benefits will have to nim here is our hedging program.
Speaker Change: and just for the facts, we got around 12 basis points of hedge dragging in the second quarter, or sorry, in the third quarter, that's going to reduce, if you look at the forward yields curve down to seven basis points in Q4 and flip over the course of 2025 to a five basis point benefit by the end of 2025.
Speaker Change: Beta Accelerating, and the hedge drag continually reducing in that beginning to be a hedge benefit as you go through the course of next year, really are the drivers of why we expect to see sustained nymph expansion from the Q4 level into Q1, into Q2 and Q3, and then continuing on from there. So expect to see a nice upward drift in them from the Q4 level throughout the course of 2025.
Speaker Change: And when you couple that with the really robust low growth, we're driving that'll be what drives NILI, I will be forced of 25, which, by the fact that I noted, you know, my favorite marks record, record NILI dollars in the 2025, really driven by those two factors.
Speaker Change: And then just, I'll expand that on your question on sensitivities, so I think your point is where it will notice, you know, it's a pretty dynamic environment for sure.
Speaker Change: And you know what while our underlying forecast assumes a couple more rate cuts this quarter and then five into next year we can very well not see those as you notice.
Speaker Change: I think in the short term for us, if you saw less or because you'd see it even better than performance and even better N.I. dollar performance.
Speaker Change: Of course, as you know, well, what would also matter a lot is the reason why you're not seeing those rate reductions and what that would imply about it.
Speaker Change: and customer and market beliefs about where rates are going. And so, you know, the welfare chart, that would be uncertain in fact, but in the short term, it would be universally positive for us to have less rate cuts. If there's more, you know, I think you've got to kind of, that's why. I do think, you know, for example, TV earlier this year when we saw market expectations for rate reductions really accelerate a lot. That was very helpful.
Speaker Change: to drive the actions around down beta. So if you did see more rate reductions, well, it might produce a little bit of short term headwinds over the longer term might actually be even better for down rate deposits of pricing. So again, so the little ones are over the short one of the long term there are pretty afraid for faster down.
Speaker Change: That's helpful. And I guess this one thing you talked earlier about traction and carolinas, just how long growth was evolving. Dr. Siddhartham's of deposit growth, you did hire a sort of a big theme on the mortgage side. We see more visits pull back, but he did that theme, which is the overall deposit gathering strategy beyond promotional rates. Where do you see deposit growth coming from?
Speaker Change: Yeah, well, what we've seen with the positive performance throughout the year is its consumer has been really, really strong, but over the course of the last of the quarters commercial now, sorry, you really catch up. And I think that's driven, you know, both by our core commercial business, but also by some of the new verticals and new markets, the mortgage service vertical in particular has been doing really well, joining a couple of billion dollars in the commercial deposits.
Speaker Change: in the third quarter and MSI. We've known before that. That could well continue to grow a lot of concern here as well. So it's, it's, commercial is now beginning to accelerate and I think as we, as we have an outlet for 25, I would expect what we're generally expecting to continue to pause the growth with the mix being slightly more commercial than consumers will go into, into next year.
Speaker Change: No, thank you.
Speaker Change: Our next question comes from the line of John Arström with Armistic Capital Markets. Please just use your questions. Hey, thanks for coming to us.
Speaker Change: Martin John, couple one clarification, I think maybe a simple question, but you're saying fourth quarter NII around a billion.
John Arstrom: 330, 340 something like that. Am I reading that right?
Speaker Change: In the second between 15 to 25 million dollars low or sequentially job, they'll be around flat up 1% on a year of your basis. Again, assuming not only did you cut where you sat, but another 225 series in the last few months of this year.
Speaker Change: Okay, okay, that's helpful, thank you for that. And then, kind of a simple question, funny question, but in slide 10, kind of want to joke about the scaling of that, but the fourth quarter 25.
Speaker Change: Bar chart implies higher NII. Is there odd questions? Is there any scaling to that Zach? Or what kind of an acceleration do you expect in NII growth throughout the year?
Speaker Change: I'm expecting pretty steady NII dollar growth from Q1 to Q2 from Q2 to Q3 and continuing on, Jon, I think the path of NIM, I'm also starting out to get into a bit of overly level precision at this point given all the uncertainties, but generally speaking, I'm expecting to see nice sustained NIM expansion in Q1, Q2, Q3 and a bit topping out into Q4, but we'll see where the great environment is at that point. And the dollars really be pretty steady growth throughout the year as Lendik sustained at a fairly solid level.
Speaker Change: It's probably the best way I can answer your question.
Speaker Change: Yeah, okay, okay, good. If I can squeeze one more and I apologize for doing this, but the merchant acquire and you're saying 1% growth to overall fee revenues.
Speaker Change: Are you saying that could be a 200 million dollar business?
Speaker Change: Is that?
Speaker Change: It's currently one of the other, but currently our hour.
Speaker Change: Yeah, a little bit off. We make roughly $25 million on a run rate cannibal basis.
Speaker Change: from Merchant Acquiring, Community Hold outsourced model that we have. As we in-source that business, we're thinking next year, can you, you know, fill the fifth email in terms of overall revenue, which is, you know, that's an extra $25 million, sort of about 1% of the overall fee revenue base as you go to next year.
Speaker Change: Okay, all right, thank you for clarifying. Yep, be honest.
Speaker Change: An ex-questions from the line of Erica the Jarring with UBS, please just use your questions.
Speaker Change: Erica, perhaps your line may be muted.
Speaker Change: Your Life Requestion.
Speaker Change: Can you hear me?
Speaker Change: are you out jo can techynology
Erica Jarring: Sorry about that. So, Zach, as you can imagine, everybody is asking about the blank box on 4Q25, 4, 5, 10. So, maybe I'll ask it this way. So, consensus wants to fill that box that would imply, you know, 8% year-over-year growth from your implied 4th quarter, 2024. So, I'm assuming that has loan growth and also the NIM inflection. So, you know, with that, with consensus filling that box in at up 8% quarter of a quarter, are they in the right ballpark as we think about, you know, your loan growth momentum and the dynamics of your balance sheet?
Speaker Change: Well, I'm not going to give you that level of guidance precision at this point of the year, er, as you know, we'll give guidance as we get into the first part of next year, but I don't think that's directly raw, frankly, I think we're, we're expecting to see MIMs rise throughout the course of 2025.
Speaker Change: I mentioned earlier, I've seen him above 3%.
Speaker Change: In the second half of next year.
Speaker Change: If you compare that to where we'll be this year, that'll be a nice...
Speaker Change: and the expansion off of our forecast for Q4, so that will drive some year-over-year growth. And then our current run rate on loan growth is around 6% on a annualized pace right now. And there's nothing that's that indicates we will not be able to sustain that pace in the next year. In fact, the fourth quarter looks outstanding in terms of loan growth and the momentum we've got across the business. And so those are relatively good underlying drivers to get to the number you're talking about without being fully declared at one time.
Speaker Change: Now that's all for thank you and...
Speaker Change: On the expense run rate, I think Zach, what you and Steve have been talking about in terms of investments.
Speaker Change: You know, really showed through with regards to your three percent year over year, quarter over quarter, sorry year over year, fourth quarter guide for fourth quarter relative to, you know, the run rate for this year and we're seeing it in the loan growth. You know, as we think about next year with the caveat that Huntington under this management team and board is constantly investing. Should we expect more of a harvest year so to speak in that perhaps that fourth quarter run rate year over year is more sustainable rather than the five five and a half percent.
Speaker Change: Yeah, great question. In the area of expenses, it's something we're incredibly rigorously focused on. And this year is playing out pretty much exactly like you expected, getting the route before and a half percent year of year growth, decelerating throughout the year.
Speaker Change: As you know, it's a really sarcastic focus on the model we've got.
Speaker Change: Driving efficiencies in baseline expenses.
Speaker Change: The Sawstick and other series of actions in the third quarter on those are continuing on it's a fairly continual process of driving or engineering to enable us to really drive the offensive expense categories that are in investment related.
Speaker Change: Technology Development, marketing, additions of people to go and drive to some of these new great revenue producing initiatives. The plan for 2025 is the same as we've had before. Cry for positive operating leverage.
Speaker Change: I do expect a little bit to the point of your last question, have a pretty solid revenue growth trajectory. And so I don't intend to, we collectively don't intend to be taking part in our best mode. We might keep driving for growth, but certainly to drive various solid improvement of positive operating over to efficiency ratio. And then just to sustain that as we go forward.
Speaker Change: Got it, and thank you so much.
Speaker Change: Thank you, Arkham.
Speaker Change: Our new questions are from the line of Maddo Connor, would Deutsche Bank. Please receive your questions.
Speaker Change: Good morning, question on the revenues came in a decent amount better than the expected with the Intracoder Guide. I assume a lot of that swing is a capital market.
Speaker Change: and maybe the low-end sale, but just anything else that surprised you that you want to call out, I mean, all the categories actually did pretty well, so I guess I'm just wondering what was kind of better than what you thought a month ago.
Speaker Change: Yeah, a great question about it, and it was primarily capital markets that you noted in the basis of your questions. We were expecting to see a pretty solid Q3 for capital markets, but it beat our expectations. You know, overall, really, really pleased with the execution.
Speaker Change: The sustained level of performance we're seeing in the three key areas of focus, 12% year-over-year growth in fees is pretty outstanding, from our perspective. The outlet for Q4 is likewise pretty solid, particularly in capital markets. I think we'll see another really good quarter sequential growth in capital markets. Well, continuing to drive a good underlying household acquisition and net flows and payments really chugging along here, particularly the addition of which it requires should be a nice mix until winter growth.
Speaker Change: Okay, and then on the credit for the CRTs as you call it, you know, now that you've got...
Speaker Change: You know, approaching your target at capital level, you know, even including OCI, you've got all the funding and all those positive, it's the got something that you're...
Speaker Change: Looking to do lots of going forward or unwind them.
Speaker Change: Yeah, great question. You know, on the plan to grow capital, it's still really good about how that's going. And as you've noted a number of times, you know, that the primary, it's the most significant driver of.
Speaker Change: of our plans to continue to drive capital hires. It's just poor organic earnings and strong return on capital. You know, we look at these CRT transactions that's really tactical and opportunistic.
Speaker Change: They're kind of an interesting innovation workplace for sure that offered great.
Speaker Change: The low return on capital for certain asset classes.
Speaker Change: and just look back to the transaction we did in the second quarter. We unlocked 17 basis points of capital for less than 3% cost of capital, just $7 million plus transaction cost. So very, very efficient. So it's possible to be opportunistic in the future around these, but we see them in that way opportunistic.
Speaker Change: and the Corps is really the underlying returner in capital and organic earnings.
Speaker Change: Got it. Okay, thank you. Thank you.
Speaker Change: As a reminder, that's the question today. You may press star 1 from your telephone keypad at this time.
Speaker Change: Our next questions are from the line of Sean Sarhan with Evercore ISI. Please just see with your questions.
Speaker Change: Good morning. I hope you can get a turn to the trends and strategy in the auto business.
Speaker Change: Productions depth up again, Link's Order in 3Q. Can you talk about the growth that I was there a little bit? And then maybe shifting to credit?
Speaker Change: There was a big update made quarter from an autopier and you saw a little bit of a step up in these uses quarter. Can you address the expected credit trend giving shifting auto values? Thanks. Yeah, sure. Thanks for the question. I'll take the first part and then bring it and we'll take off the second part around the record.
Speaker Change: So really, really pleased actually with what we're seeing in the auto low production area, you know, auto for us is a terrific asset to lean into at times like this, one of the general expectation for rates is to be reducing the nice fixed asset class, got about a two year duration, remember this is prime and super prime credit quality is a very, very solid underlying returns, and it also incredibly efficient business for us, is a 10% efficiency ratio of business, [inaudible]
Speaker Change: for us that it is very, very optimized.
Speaker Change: and we can put in pricing in the market off Friday.
Speaker Change: See the impact of it over the weekend, dial it back in, again, the next Tuesday as we go into the next week and so really, really optimisable and precision return calibration for us here. So we like this one. I think that
Speaker Change: The production levels for the fourth quarter looked to be around the same at the third quarter years, so I think we've had to get a nice run rate at this point and then we'll see where it goes out into the course of next year, but right now nice, nice big asset that we're getting very significant.
Speaker Change: Fixed out the repressing benefits coming through into the mail. Brandon, over to you on credit. Sure, Sean's Brendan, and given our history in this industry, we have the ability to utilize our custom score cards to really drive the customer selection that Zach was referencing. And that continues to be a strength for us. You know, we've seen, we've seen the length of city charge outs that were made right within our historical levels. So we're not seeing broad deterioration at all. And frankly, with our deep industry expertise, we're traditionally lower than the peer set when it comes to charge-offs or delinquencies. And that trend continues this quarter. So we feel real confident in this book.
Speaker Change: John, we've been this esteemed with a very disciplined, we've got 15 years of quarterly track record here, it's an area of continuing focus and discipline as well as we'll refine the bottle on a group of times during the course of the period of time. So we like what we're seeing with very confident and obviously with the disciplines we have super prime prime, we're not going to see what you alluded to from our institution.
Speaker Change: I'm very helpful. Thank you. And then Zach.
Zach: Chipping over to the Hedge program slide that's always helpful. Notice we received fixed balance in the back after 25 came down a bit.
Zach: this quarter-first last.
Speaker Change: Can you update us on any adjustments made there in the quarter and then maybe highlight any future adjustments you're thinking about. Thanks.
Speaker Change: Thanks for bringing that question up, John. So, what we tried to illustrate in that slide is really the continued dynamic management about sensitivity, really bringing down our sensitivity a lot.
Speaker Change: Both the third reduction in sensitivity just in the third quarter alone gets a 50% reduction from Q2 by the end of the year and then the 60% by the middle of next year. And one of the things we try to highlight all the time in this is very dynamic so we're continually looking at the most efficient way to really do those two objectives of protecting capital and maximizing and stabilizing them.
Speaker Change: So we'll always make adjustments here as we've deemed it most efficient, you know, an apple of value just in another billion dollars and forwards, starting over the years.
Speaker Change: just in the early part of this quarter that are really starting out into the second half of the 2025 that will just continue to drive us at sensitivity lower us at the time when we really want it. So we're always doing this. Really, primarily at this point, the game plan, these are the assets sensitivity, these gradually allow the pay-fix options to reduce and to expire.