Credit Worries Loom Large For First Horizon

First Horizon (FHN) has been a notable laggard this year compared to peer regional banks, and I believe at least some of that is due to outsized worries about the loan portfolio of the bank it is acquiring – IBERIABANK’s (IBKC) 5% loan exposure to energy isn’t looking very attractive now, and there are valid concerns over how much reserving will be needed for those loans. On top of that, First Horizon has its own challenges with its loan book, including loans to franchisees and other hospitality/consumer discretionary businesses.

First Horizon’s capital is not as strong as I’d like, and I expect further reserving will be necessary (particularly in the case of Iberia’s book). On the other hand, management’s economic assumptions don’t appear at all heroic, and businesses like the fixed income trading will help generate pre-provision profits through this downturn. First Horizon is definitely a higher-risk call now, and I can understand why investors may want to stay away for the time being.

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Credit Worries Loom Large For First Horizon