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Huntington explains low capital ratios under DFAST scenario

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Huntington explains low capital ratios under DFAST scenario

HuntingtonBancshares Inc. executives shared their read on the bank'ssurprising stumble during the recent Dodd-Frank Act stress test during a second-quarterearnings call.

In June, the Federal Reserve that the bank would book thelowest common equity Tier 1 ratio of any company participating in the 2016DFAST review under the severely adverse economic scenario, at 5.0%. The bankitself calculated aCET1 ratio of 5.46% under the severely adverse scenario. Both figures stand instark contrast to lastyear's CET1 ratio of 8.7%. The low ratio cast a shadow ahead of thebank's Comprehensive Capital Analysis and Review results, announced June 29.

Chairman, President and CEO Stephen Steinour said during theJuly 21 call that management lacks complete insight into the Fed's "blackbox" but that the process is "very different" for a companygoing through an acquisition. He said management knew that the bank's CET1ratio was about 220 basis points below its peers going into the stress test,given its "aggressive" return of capital to shareholders in 2014 and2015. He added that, in addition to the pending that is expected to impactCET1 by 100 basis points, Huntington's acquisition of Macquarie Equipment Finance was donewithout issuing any additional capital. And modeling for a business combinationin a severely adverse scenario imposed an additional cost of 50 to 70 basispoints to CET1.

"So when you reconcile all those things and considereverything from the starting position, it really is related to going throughthe business combination in the CCAR process," he said.

Despite the bank's low CET1 ratio in the DFAST test, itstill received a nonobjection from the Federal Reserve a week later forat 14% increase in the quarterly dividend, to 8 cents per share; the bank didnot include a share repurchase program. CFO Howell McCullough III said executivesdecided to exercise caution in the bank's capital return ask and focus onsecuring approval for the still-pending FirstMerit deal, which is expected toclose in the third quarter. He said that an on-time or even early deal closewill create "so much more value" for shareholders compared to a stockbuybacks, but shed no details on what future capital asks will look like.

"What I would tell you going forward is that we'll takeeach year as it comes," he said. "Next year is a different process,we expect to be in a different position."

The bank reported second-quarter net income of $175 million, or19 cents per share, compared to $196 million, or 23 cents per share, for thesecond quarter of 2015.