Hudson City Completes Restructuring - Analyst Blog
March 30 2011 - 5:30AM
Zacks
Yesterday,Hudson City
Bancorp Inc. (HCBK) announced the completion of its
balance sheet restructuring. The restructuring condensed
higher-cost structured borrowings, which are expected to increase
net interest income in the coming quarters as interest expenses
goes down.
As a part of restructuring, Hudson
City paid off $12.5 billion in structured quarterly putable
borrowings. The funds for the payment were arranged through the
sale of $8.7 billion of securities and $5.0 billion of new
shorter-term fixed maturity borrowings with an average cost of
0.66%.
Recent market proceedings and the
United States government’s participation in both the mortgage
markets, through the government-sponsored enterprises (GSEs) such
as Fannie Mae (FNMA) and Freddie
Mac (FMCC), and the maintenance of low market interest
rates, resulted in an environment that has caused balance sheet to
be less responsive to the existing market conditions. In the
presence of extensive low interest rate environment, Hudson City
hastened prepayment speeds on mortgage-related assets, which
resulted in reinvestment in these instruments at the current low
market interest rates. These lower-yielding assets and higher-cost
borrowings, which did not reprice during this extended low rate
environment, have resulted in interest rate risk and margin
compression concerns for the company.
Due to the existence of low
interest environment, banks are facing increased interest rate risk
and liquidity concerns. Therefore, Hudson City has reduced its
borrowings to address such concerns. The company restructured its
balance sheet at an appropriate time when market interest rates
started to increase with the intention of protecting shareholders'
equity as much as possible and increase earnings potential in the
forthcoming quarters.
By reducing the disparity of
investing and funding rates, Hudson City will be well positioned to
gain from a rising interest rate environment and by growing assets.
Further, Hudson City's strong business model, solid capital
position and conservative underwriting will boost financial
position of the company.
HudsonCityexpects the transactions
to negatively impact first-quarter 2011 after-tax earnings by
roughly $644 million or $1.30 per share. For full-year 2011,
the loss from the restructuring will be reduced by four quarters’
earnings, excluding the restructuring charge.
HudsonCityanticipates restructuring
transactions to have no effect on Tier 1 leverage capital ratio.
However, excluding restructuring, the ratio is expected to increase
to more than 8.0% by March 31, 2011, attributed to first-quarter
2011 earnings. Further, the restructuring transactions will
improve the net interest margin at least by 40 basis points for the
second quarter of 2011 compared with the fourth quarter of
2010.
In April, Hudson City’s board of
directors is expected to announce the dividend rate to be paid to
the shareholders, considering the restructuring action.
JPMorgan Chase &
Co.(JPM) acted as adviser to the company on the balance
sheet restructuring plan.
Hudson City currently retains its
Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
Also, considering the fundamentals, we are maintaining a long-term
“Neutral” recommendation on the stock.
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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