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Huntington Bancshares, Inc.

HBAN: NASDAQ

Huntington Bancshares, Inc. is a regional bank founded in 1866 and concentrated in the mid-west. It has $67B in total loans and $77B in deposits as of March 31, 2017. [1] Huntington offers banking, borrowing, investment, insurance and planning services to consumers and small to medium enterprises. It acquired FirstMerit in August 2016, which expands its customer reach and creates a stronger market-leading regional bank for customers and employees. [2]

Investment thesis
Having followed Huntington since mid-2014, we have witnessed what we believe to be a strong management team grow the business in a way that we think is conservative and sustainable. Total loans have grown from $46.1B in 2014 to $67.0B as of March 31, 2017, an above average growth rate among peers, which has supported earnings progression. Huntington has also focused on loan quality as net charge-offs were only 0.50% of total loans in the first quarter of 2017 and have been declining as a percent of the total. [3] Further, we suspect that there will be significant synergies with FirstMerit and further opportunities to drive down costs to increase the dividend and earnings.

Confirmation through research
Since 2009, the company has been focused on a new core strategy to organically grow market share with relatively low volatility. [4] It has refocused the business model on consumer, small to medium enterprises and auto, built the brand, and invested in the franchise, all while focusing on risk management. [5] As a result, loans have grown above GDP growth and net interest margins (NIM) have expanded to support growth in the dividend. [6]

We believe that above average growth and NIM expansion should continue as the company integrates FirstMerit and focuses on additional internal revenue enhancement opportunities. Management set cost savings goals in 2015 and more associated with the FirstMerit acquisition, both of which are on track. [7] In addition to cost synergies, there is also opportunity for Huntington to increase FirstMerits’ noninterest income contribution, which would provide further upside not yet included in assumptions. [8] We expect this earnings growth to support further growth in the dividend, which currently yields 2.3%, adding to shareholder returns. [9] In addition to growth, risk management is also critical for banks and Huntington’s balance sheet efficiency is best-in-class having now completed several actions to better position itself. [10]

Variant Perception
Anchor strives to invest with managements that are fully aligned with shareholder values and we feel Huntington has strong incentive plans in place, which we expect will drive shareholder returns over the long term. Based on our research and conversations, we believe that Huntington is undervalued given its growth profile and quality of assets.