DBRS Downgrades Huntington Bancshares Inc. to BBB (high); Trend Stable

DBRS has today downgraded all long-term ratings for Huntington Bancshares Inc. (Huntington or the Company) and its related entities, including Huntington’s Issuer and Senior Debt rating to BBB (high) from A (low). At the same time, DBRS has confirmed all short-term ratings. The trend on all ratings has been changed to Stable from Negative. The rating action taken on Huntington’s short-term obligations recognizes the significant liquidity enhancements currently provided by the U.S. government.

These rating actions follow Huntington’s release of Q4 2008 and FY 2008 results, which included net losses available to common shareholders of $440 million and $160 million, respectively. The losses for the quarter and the year were negatively affected by a sizeable increase in credit costs, the bulk of which was related to the Company’s Franklin Credit Management (Franklin) relationship, a narrowing net interest margin (NIM) and sizeable other-than-temporary-impairment (OTTI) charges related to its Alt-A mortgage-backed securities portfolio. In certain circumstances, DBRS can tolerate losses equivalent to one year’s worth of income before provisions and taxes; however, when losses exceed this amount and underlying creditworthiness is impaired, negative rating action is normally taken. DBRS notes that Huntington has surpassed this threshold for fiscal year 2008 and, as noted in our May 23, 2008, press release, negative rating actions could be triggered by the piercing of DBRS’s one-year threshold of income before provisions and taxes.

The Company’s ratings are underpinned by a solid Midwest franchise, reflecting diversified revenue sources, adequate liquidity and regulatory capital. The ratings also take into consideration Huntington’s strained asset quality, which has been severely pressured by its outsized Franklin Credit Management (Franklin) relationship. DBRS commented that sustained elevated credit costs and/or significant charges may place pressure on ratings. Conversely, a return to historical financial performance, punctuated by improved asset quality, higher tangible common equity and sustained solid earnings could have positive rating implications.

Given the rapidly deteriorating economy and a housing market that is showing little sign of stabilization, Huntington’s asset quality will continue to be pressured. Moreover, there remains the overhang related to the Franklin exposure, which contains potential loss content. Nonetheless, Huntington’s core (non-Franklin) loan portfolio is relatively sound and credit metrics fall within the range of its peers. At December 31, 2008, Huntington’s non-performing assets (NPA) represented 3.97% of loans versus 1.64% at September 30, 2008, and Q4 2008 net charge-offs (NCOs) represented a very high 5.41% of average loans, up from 0.82% for the prior quarter. DBRS notes that the material increase in both these metrics reflected the $650 million and $423 million in Franklin-related non-accruals and NCOs, respectively. For 2008, loan loss provisions exceeded NCOs by 1.4 times. Nonetheless, allowance for loan loss reserves was moderate, at 60% of non-accrual loans.

Huntington’s capital position is adequate and reflects the new reality of capital thresholds for banks with strained asset quality. Reflecting its recent preferred stock issuances, which aggregate to approximately $2.0 billion, and includes $1.4 billion as part of the U.S. Treasury’s Capital Purchase Program, Huntington’s regulatory capital has been augmented, providing additional loss absorption capacity. At December 31, 2008, the Company’s Tier 1 and Total risk-based capital ratios were 10.76% and 13.96%, respectively. DBRS commented that Huntington’s tangible common equity ratio was pressured by Q4 2008 results and decreased to a relatively low 3.98% from 4.88% at September 30, 2008. DBRS noted that Huntington’s recent dividend reduction should assist internal capital growth.

The Company’s liquidity profile remains acceptable and is underpinned by a core deposit base that accounts for approximately 73% (at September 30, 2008) of net loans. At September 30, 2008, Huntington’s securities portfolio represented 8% of total assets and consisted mostly of mortgage-backed securities and municipal bonds. Nonetheless, within the portfolio is a moderate amount of Alt-A mortgage-backed and pooled trust preferred securities, which may likely experience future OTTI-related charges, given the rapidly declining operating environment. Huntington’s access to the Federal Home Loan Bank, Treasury Auction Facility and Federal Reserve Discount Window round out its liquidity portfolio.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.