Huntington Bancshares Incorporated (HBAN)
Michael Behan, CFA Equity Sector Analyst
Price: $8.27
Sector: Financials
Dividend: $0.28
Dividend Yield: 3.4 %
Industry: Regional Banks
Market Cap: $6,574 million
Huntington to Buy FirstMerit for $3.4B
• Tuesday before the open, Huntington Bancshares Inc. and FirstMerit Corp. the Ohio-based companies announced a merger agreement where HBAN will acquire First Merit for $3.4B in cash and stock.
• Correspondent providers Morning Star and Credit Suisse rate Huntington Bancshares (HBAN) Neutral and Buy respectively. Morning Star gives FirstMerit Corp (FMER) a buy rating.
• ASG prefers to non-life insurance and companies with less interest rate exposure when investing within the Financial sector, and therefore we recommend underweighting regional banks. For clients looking for exposure to banks we like JPMorgan (JPM), US Bancorp (USB) and BB&T (BBT).
Columbus-based Huntington will buy Akron-based FirstMerit for $3.4 billion in total, exchanging 1.72 Huntington common shares and $5 in cash for each FirstMerit common share. The per-share consideration of $20.14 is based on Huntington's Jan. 25 stock price of $8.80 per share.
The merger, which is expected to close in the third quarter and is still subject to regulatory and shareholder approvals, will likely be accretive to Huntington's EPS in 2017, excluding one-time deal-related expenses, and be approximately 10% accretive to EPS in 2018.
The pro forma tangible capital equity-to-tangible assets ratio is pegged at 7.1% at closing and the pro forma common equity Tier 1 ratio at 8.7% on a fully phased-in Basel III basis. Huntington will not re-submit its 2015 CCAR capital plan, and intends to forgo the remaining $166 million of share repurchase capacity. Huntington will include FirstMerit in its 2016 CCAR capital plan proposal and expects the plan will include share repurchases.
Valuation: Shares of HBAN currently trade at 9.2x the next 12-month consensus EPS estimate of $0.88 , compared to the historical average of 12.0x . On a relative P/E basis to the S&P 500 Index, HBAN trades at 0.6x compared to the historical average of 0.8x .
Risks: Investing in the financial sector comes with a number of risks. In general, credit is sensitive to the swings of the economic cycle; a downturn in the economy often results in higher default rates resulting in lower earnings and stock prices. Financial companies typically carry outsized leverage relative to other sectors which can magnify negative outcomes. Furthermore, the sector is the most highly regulated relative to other sectors. Regulatory actions can negatively impact capital, profitability as well as shareholder returns.
Just my opinion, of course.
