We have maintained our Neutral recommendation on People’s United Financial Inc. (PBCT). The decision is based on synergies gains expected from recent acquisitions, but low interest environment might act as a deterrent to net interest income of the company.
In January, People’s United announced fourth-quarter 2010 operating earnings per share of 10 cents, in line with the Zacks Consensus Estimate. Results compared favorably with 8 cents per share reported both in the prior quarter and prior-year quarter. The modest improvement in results was attributed to lower provision for loan losses, higher net interest margin (NIM) and enhanced revenue, which was partly offset by higher non-interest expenses.
Despite an asset sensitive balance sheet, People’s United continues to pose a modest capital position with capital ratios exceeding each of the regulatory requirements. Its tangible equity ratio and total risk-based capital ratio were 14.1% and 14.8%, respectively, as of December 31, 2010.
Recently, People’s United completed the acquisitions of Smithtown Bancorp Inc. and LSB Corporation. These acquisitions, which would extend the company’s presence in New England and New York State, will be accretive to 2011 earnings. Further, People’s United’s announcement of the acquisition of Danvers Bancorp Inc. marks a platform for the company’s growth, and is expected to close in the second quarter of 2011.
Along with inorganic growth, People’s United remains committed to its organic growth through its business franchise. Despite the slowly improving economy, the company performed well with continued growth in its core loan portfolios as well as deposits in 2010. The company’s core C&I and commercial real estate loans grew progressively throughout 2010. Going ahead, People’s United’s deposits and loan portfolios are well positioned to experience higher growth once the markets rebound and interest rate stability resumes.
Though margins benefited from the completion of two acquisitions coupled with a reduction in the cost of deposits, but was partially offset by the low interest rate environment. Given the sluggish market recovery, the significant disruption and volatility caused in the financial markets might challenge margins in the foreseeable future. Further, the financial health of People’s United worsened on weak credit metrics since the last couple of years. In 2010, these metrics had been volatile in nature responding to market conditions. The continuity of such an adverse trend casts a cautious growth outlook for the company.
People’s United’s banking business is heavily regulated by the federal and state governments. Bank regulations and changes in state and federal tax laws could anytime hurt the business further. In July, the Dodd-Frank Act implemented significant changes in the financial regulatory backdrop, which would impact all financial institutions including People’s United.
Overall, People’s United is trying to overcome the challenging economic environment through opportunistic acquisitions and improving NIM. The announcement of the recent acquisitions coupled with positive earnings reflects strength in capital and liquidity of the company. Though in the quarter, credit quality improved, loan loss provisions decreased and net charge-offs lowered, but low interest rate environment remains a concern as it might affect NIM in the upcoming quarters. However, we believe People’s United’s earnings will improve based on synergies gains resulting from completion of all recent acquisitions.
People’s United currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold’ rating. Moreover, we also maintained a ‘Neutral’ recommendation on People’s United’s closest competitor – Hudson City Bancorp Inc. (HCBK).
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
PEOPLES UTD FIN (PBCT): Free Stock Analysis Report
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