HCBK (MM)

We are upgrading our recommendation on Hudson City Bancorp Inc. (HCBK) to Neutral from Underperform. The revision follows a detailed analysis of the company’s fundamentals post second quarter results.

Hudson City’s second-quarter 2011 operating earnings came in at 19 cents per share, outpacing the Zacks Consensus Estimate by a penny. However, this compared unfavorably with the earnings of 29 cents in the prior-year quarter.

Operating earnings reflected lower interest expense and a reduced provision for loan losses. The positives were offset by lower interest and dividend income, a substantial decrease in non-interest income, and increased non-interest expense.

Hudson City has completed its balance sheet restructuring, which has substantially reduced higher-cost structured borrowings and is projected to increase net interest income in the coming quarters as interest expenses decrease. 

The restructuring efforts led to an improvement in net interest margin in the second quarter. We believe that the restructuring initiatives, its strong business model and a solid capital position would aid results.

Yet, a low interest rate environment would likely compress the net interest margin from its new higher level. This, combined with the reduction in balance sheet size owing to the restructuring transaction, would restrict top-line improvement.

Moreover, considering the restructuring action, the company also reduced the quarterly dividend by 47% to 8 cents per share from 15 cents paid in the prior quarter.

Therefore, the positive and negative factors seem balanced for Hudson City and is therefore rated Neutral.

Hudson City currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Its closest peer, People's United Financial Inc. (PBCT), however, has a Zacks #2 Rank, implying a short-term ‘Buy’ rating.

 
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
 
PEOPLES UTD FIN (PBCT): Free Stock Analysis Report
 
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