Huntington Bancshares has weathered the recent storms in the regional banking sector with admirable resilience. They've emerged as a potential "winner," growing deposits, expanding into new markets, and confidently projecting accelerated loan growth in the coming year. However, a closer look at their Q4 2023 earnings call transcript and a comparison to the Q1 2024 transcript reveals a potential red flag that other analysts might be overlooking: the impact of Huntington's ambitious efficiency program, "Operation Accelerate," on their short-term earnings trajectory.

On the surface, "Operation Accelerate" seems like a textbook efficiency drive. It encompasses voluntary retirements, branch closures, staffing adjustments, and a significant investment in offshoring business processes. This strategy is designed to streamline operations, reduce costs, and, in the words of CFO Zach Wasserman, "cumulate in their impact over time."

However, the narrative surrounding "Operation Accelerate" shifts subtly between the Q4 2023 and Q1 2024 earnings calls. In the Q4 call, the emphasis is on the program's long-term benefits, with Wasserman assuring investors that it would "yield very significantly better earnings growth trajectory through the course of 2024 and 2025." By the Q1 2024 call, the tone becomes more focused on short-term stability, with Wasserman emphasizing that Q4 2023 core expense levels would remain "pretty similar" throughout 2024.

This shift in emphasis suggests a possible disconnect between the short-term costs of "Operation Accelerate" and its promised long-term benefits. While the program is undoubtedly generating efficiencies, it's also likely driving significant upfront costs, including severance packages for retiring employees, transition expenses related to offshoring, and investments in new technology and automation.

These upfront costs, coupled with Huntington's aggressive hiring in new markets and specialty verticals, appear to be contributing to the bank's somewhat muted short-term earnings outlook. Despite a confident loan growth projection of 3%-5% for 2024, Huntington's net interest income guidance remains stubbornly range-bound between -2% and +2%, with Wasserman acknowledging that the margin outlook is "a touch lower than was the case before."

Here's where the hypothesis gets interesting. Let's delve into the numbers a bit. In the Q4 2023 transcript, Wasserman described the bank's commitment to "staying on a growth footing" as a contrarian approach, acknowledging that it would result in "an overall expense growth that was higher than we would want to have relative to revenue growth." This statement implies that Huntington is consciously accepting a period of suboptimal efficiency to fuel its ambitious growth plans.

Now, let's look at the year-over-year core expense growth. In Q4 2023, it was reported at 4.7%. This number is notably higher than the bank's full-year 2023 core expense growth of 3.3%, suggesting that the impact of "Operation Accelerate" and new hiring is indeed accelerating, not cumulating, in the short term.

Further, Huntington's projected full-year core expense growth for 2024 remains at a robust 4.5%, a level that some analysts have questioned in light of peer guidance trending lower. This sustained high level of expense growth, against a backdrop of potentially lower net interest income due to a delayed rate cut cycle, suggests that "Operation Accelerate" could be weighing on Huntington's short-term earnings more heavily than expected.

Projected Loan Growth vs. Net Interest Income Guidance

The following chart highlights the potential discrepancy between Huntington's projected loan growth and their net interest income guidance for 2024.

This isn’t to say that "Operation Accelerate" is a flawed strategy. Huntington's long-term growth prospects remain compelling. Their focus on specialty lending, regional expansion, and market share gains in key areas like distribution finance and auto floor plan positions them well for continued success. However, investors should be aware of the potential short-term trade-off between efficiency gains and upfront costs.

Huntington Bancshares, under Steve Steinour's leadership, has a history of bold, contrarian moves. Their commitment to "Operation Accelerate" is no exception. While the program holds promise for the future, its immediate impact may be a temporary drag on earnings. The question for investors is whether the long-term gains will justify the short-term sacrifice. Only time will tell if "Operation Accelerate" will truly live up to its name.

"Fun Fact: Huntington Bancshares is one of the oldest banks in the United States, with a history dating back to 1866. The bank was founded in Columbus, Ohio, just three years after the end of the Civil War. Throughout its long history, Huntington has witnessed and adapted to numerous economic cycles and banking crises, demonstrating its enduring resilience."