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The PPP Will Drive Huntington Bancshares Significantly Higher This Year

Huntington Bancshares, like all banks, has been beaten down over the past couple of months.
As the number one lender in SBA loans by volume, the bank stands to benefit a great deal from the Payroll Protection Program.
The PPP is essentially free money for the bank, as it can generate fees from originating and selling the loan.
Further, these loans come with no hit to regulatory capital requirements, so the bank can essentially originate as many as its infrastructure can handle.
Overview
Huntington Bancshares (HBAN) is a $100 billion national bank, headquartered in Ohio. Like every other bank, shares have been hit hard over the past couple of months. For good reason too; the current environment is filled with uncertainty and market conditions are not exactly ideal for banks to thrive.

We've written many articles about banks, and we are bullish on the entire sector. We don't believe that this will be a repeat of the financial crisis. Banks are much more capitalized, have access to ample liquidity from the Fed, and are generally much healthier than compared to pre-crisis.

For this reason, we believe that the market is overly pessimistic in its valuations towards banks. Huntington is no exception. Recency bias is likely coming into play here, as the bank did not fare well during the previous recession. However, the bank has made great strides since, and we believe that the bank is much healthier. It has done a good job of de-risking the loan portfolio, setting concentration limits, and improving underwriting standards. The number one reason we are bullish on Huntington, though, is because of their small business lending program. The bank is the number one SBA lender in volume.

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The Small Business Paycheck Protection Program
A couple of weeks ago, the Small Business Paycheck Protection Program was announced. This program provides forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The loan (1% interest for 2 years) is forgivable for small businesses if they use the proceeds to cover payroll, mortgage interest, rent, and utilities. This is great for small businesses. This is free money for banks.

The SBA is guaranteeing 100% of the loan, which means that the loan carries no credit risk for the bank. According to the interim final rule, these loans

“neutralize the regulatory capital effects of participating in the Federal Reserve's PPP facility because there is no credit or market risk in association with PPP loans pledged to the facility. Consistent with the agencies' current capital rules and the CARES Act requirements, the interim final rule also clarifies that a zero percent risk weight applies to loans covered by the PPP for capital purposes.”

Banks are constrained by capital requirements from a leverage and risk-based perspective. This prevents banks from leveraging their balance sheets to levels that we saw during the financial crisis, and also prevents them from creating a balance sheet filled with credit risk. The interim final rule means that these loans do not count against either of these restraints, and thus the bank can theoretically originate as many of these loans as its infrastructure allows.

Huntington is in a great position to benefit from this program. As the number one SBA lender by volume, the bank already has the infrastructure in place to best handle the large number of applications coming its way. Further, it already has one of the largest customer bases in small business lending. Demand has been so high, that the bank had to temporarily stop taking applications due to the extremely high volume it has received.



Source: Huntington Bank

A Huntington Bank spokeswoman said the bank had received applications totaling over $4 billion in loan requests since the program launched last Friday. The bank has so far secured nearly $2 billion in loan guarantees from the SBA.

The bank is getting compensated through origination fees from the government each time it completes an application. Below is the fee structure:



Source: PPP Lender Information Fact Sheet

It's impossible to break down by loan amount, but let's assume all loans are $2mm or greater and earn a 1% origination fee. The $2 billion in loan guarantees will generate ~$20mm in fee income for the bank. If the bank gets through the $4 billion in applications, that's ~$40mm in fee income for the bank. Further, that's an additional $40mm in interest income for the year.

We believe that this fee income will flow directly to the bottom line. The SBA is not collecting any fees. The bank is not paying for advertising or marketing to drive applications. Likely no additional salary expenses will be incurred as the bank already has infrastructure and can devote more resources to the program. The bank doesn't even need to fund the loans since they don't count toward regulatory capital requirements.

Most importantly though, banks can sell these loans in the secondary market. So essentially, what the bank can do is originate the loan for a fee, and then turn right around and sell the loan for a fee.

At the end of FY2019, Huntington had net income of $1.34 billion. We believe that over the next quarter, the bank could easily generate $150 million through origination fees and loan sales alone. This represents an increase of ~11%, and would boost EPS by $0.14.

The Bottom Line
Huntington is in a great position to take advantage of the Paycheck Protection Program. The fees generated from originating and selling the loan (or the interest income received from holding the loan) is free money to the bank. As the largest SBA lender by volume, we believe that Huntington has an early advantage due to its infrastructure and customer base.

We believe fair value is $18, implying a price to tangible book value of 2.25x. This presents an upside of ~100% given the current share price of $9.03.

Full article at
https://seekingalpha.com/article/4337249-ppp-will-drive-huntington-bancshares-significantly-higher-this-year?source=feed_f&utm_campaign=twitter_automated&utm_content=article&utm_medium=social&utm_source=twitter_automated