We are reiterating our Neutral recommendation on People’s United Financial Inc. (PBCT). The recommendation is based on the company’s detailed analysis of fourth-quarter 2011 earnings and its expense savings initiatives.

In January, People’s United reported fourth-quarter 2011 operating earnings per share of 17 cents, missing the Zacks Consensus Estimate by 2 cents. Moreover, earnings lagged the prior quarter’s figure by 2 cents. Quarterly results were impacted by a lower top line coupled with a downtrend in credit quality driven by economic weakness. However, lower non-interest expenses reflected better expense management.

People’s United is highly emphasizing on its cost reduction efforts in order to increase the recurring operating income. During the fourth quarter 2011, People’s United rightsized its employee base after the completion of 4 acquisitions in 2010 and the Danvers transaction in July 2011. This action is expected to result in compensation savings of $13 million in 2012.

Consolidation of about 15 branches during 2012 is also expected, resulting in $4 million of operating expense savings. We expect such measures to help improve the company’s bottom line in the upcoming quarters.

Despite an asset sensitive balance sheet, People’s United Bank continues to pose a modest capital position, with capital ratios exceeding each of the regulatory requirements. Its tangible capital ratio and total risk-based capital ratio were 11.1% and 14.0%, respectively, as of December 31, 2011, far exceeding the regulatory minimum requirements of 1.5% and 8%, respectively.

However, thenet interest margin has been impacted by the historically low interest rate environment and the company’s continued investment of a portion of its excess capital in relatively low-yielding short-term investments. However, the company successfully recorded an improvement in its net interest margin in 2010 as well as in 2011, primarily due to the benefits from the acquisitions completed over the past two years, an increase in investment income and lower deposit costs.

Yet, given the sluggish market recovery, we expect significant disruption and volatility caused in the financial markets to challenge margins in the foreseeable future. Moreover, regulatory issues remain a concern.

People’s United currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. However, one of its peers — Hudson City Bancorp Inc. (HCBK) retains a Zacks #5 Rank, which implies a short-term Strong Sell rating.

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