Huntington Bank offsets rising deposit costs with fee growth

CFO Zach Wasserman stated that strong organic fee revenue is enabling Huntington Bancshares to counteract slightly lower than expected net interest income as regional lenders face increasing pressure on their cost of deposits. The Columbus, Ohio-based institution reported bringing in $4 billion in new funds during the second quarter, which raised its total deposit portfolio to $223.4 billion. However, the expense associated with holding these liabilities edged upward by six basis points to reach 1.88 percent according to an earnings presentation released after trading hours.

Analysts noted that this increase places Huntington on the high end of its peer group regarding funding costs. Truist Securities analyst Brian Foran highlighted in a Thursday note that while CEO Steve Steinour described the bank as intentionally positioning itself ahead of future loan growth requirements, Wasserman acknowledged that deposit expenses could continue to creep up slightly. Consequently, executives indicated during their earnings call that full-year net interest income expectations would likely fall at the lower end or just below their targeted range of 39 percent to 43 percent.

Wasserman pointed out in an interview that Huntington is not isolated from this trend, noting that six of ten large regional banks experienced a rise in deposit costs during the second quarter. He attributed much of this industry-wide pressure to faster loan growth across the sector, with seven of his tracked peers achieving annualised loan expansion rates near 10 percent. The necessity for deposits to fund these loans has intensified competition and driven up pricing, alongside the potential impact of further interest rate hikes.

Despite the margin pressures, Wasserman emphasised that the bank would not curtail growth merely to save a fraction on deposit costs, citing an adjusted return on tangible common equity of 17.5 percent for the quarter. However, Truist Securities analyst David Smith expressed concern in a Friday note that investors worry banks will be forced to pay higher rates for incremental funding, which could dilute margins even if net interest income expands.

J.P. Morgan Securities analyst Anthony Elian identified deposit cost competition and the necessity of paying up for new funds as the primary topic during recent second-quarter earnings calls for regional lenders. He warned that banks with lower costs than peers but loan growth at parity or above are most vulnerable in the near term, specifically mentioning Memphis-based First Horizon and Salt Lake City-based Zions.

Wasserman expects deposit pricing trends to moderate soon, partly because Huntington can optimise a large base of deposits acquired through its purchase of Houston-based Cadence Bank. The acquisition added approximately $43.5 billion in assets, providing an opportunity to reduce costs selectively. Strategies include incentivising existing customers to maintain higher balances at favourable rates, though executives admitted that realising these savings from the Cadence integration will be slower than planned due to prevailing high interest rates.

Regional competition varies significantly across Huntington’s footprint. The Midwest remains the most competitive region for deposit pricing according to management, a sentiment echoed by Ohio peer Fifth Third Bank on recent calls. CFO Bryan Preston of Fifth Third noted that growing deposits is becoming more expensive and suggested growth will likely come from higher-rate accounts in the near term.

Wasserman argued that differences in regional pricing are somewhat exaggerated, amounting to roughly 10 to 15 basis points. He also observed that Texas faces less competition than the Southeast because large banks hold about 70 percent of the deposit market there, influencing broader rates downward. Huntington operates across 56 rate regions and aims for granular pricing using artificial intelligence to analyse customer behaviour.

To bolster net interest income, which constitutes approximately 74 percent of revenue, the bank highlighted fee growth driven by momentum in payments, wealth management and capital markets. These areas are benefiting from recent investments, giving confidence that full-year fee income will meet or exceed a range of 31 percent to 33 percent.

However, generating this fee revenue carries significant expense burdens. Huntington’s non-interest expenses rose 51 percent year over year to $1.8 billion in the second quarter according to an earnings release. This increase included $27 million in higher personnel costs driven by incentive and performance-based compensation, with capital markets being responsible for most of that rise.

Separately, other banking stories emerged regarding Byline Bank, which has nearly quadrupled in size since Alberto Paracchini helped recapitalise it in 2013. The Chicago lender is using tiered employee access to manage AI costs while pursuing internal efficiencies. Additionally, one of the oldest banks in the country announced that longtime executives Doug Petno and Troy Rohrbaugh will each hold two roles as Marianne Lake retires from her position.