HCBK (MM)

We are reiterating our Neutral recommendation on People's United Financial Inc. (PBCT) backed by the company’s better-than-expected first-quarter 2011 earnings.

In April, People's United reported first-quarter 2011 operating earnings per share of 15 cents, surpassing the Zacks Consensus Estimate by 3 cents. Moreover, earnings compared favorably with 10 cents per share reported in the prior quarter and 8 cents in the prior-year quarter. The modest improvement in results was attributable to higher net interest margin (NIM) and enhanced revenue, partly offset by higher non-interest expenses and increased provision for loan losses.

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 13.9% and 14.8%, respectively, as of March 31, 2011.

In 2010, 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. in the quarter 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 ongoing economic turmoil, the company performed well with continued growth in its core loan portfolios, as well as deposits in the first quarter of 2011. The company’s core C&I and commercial real estate loans, which soared progressively throughout 2010 and continued in the reported quarter, were attributable to in-footprint multifamily loan growth. Further, deposits posed a healthy annualized growth of 3.9%. We also expect strong portfolio growth within the existing loan products and deposits, as well as opportunities to introduce new products. Going ahead, the company’s deposits and loan portfolio will likely experience higher growth once the markets rebound and provide interest rate stability.

Margins benefited from the completion of the acquisitions, coupled with a reduction in the cost of deposits, partially offset by the low interest rate environment and the company’s asset sensitive balance sheet. Given the sluggish market recovery, the significant disruption and volatility caused in the financial markets might challenge margins in the foreseeable future.

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. People’s United expects the Act’s interchange fee provisions to reduce interchange fee revenue, beginning in the third quarter of 2011.

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 metrics remained volatile, loan portfolio and deposits growth acted as positives.

People's United currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold’ rating. However, People’s United’s closest competitor - Hudson City Bancorp Inc. (HCBK) retains a Zacks #5 Rank (a short-term “Strong Sell” rating).

 
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