Hudson City Stays Neutral - Analyst Blog
January 23 2012 - 11:03AM
Zacks
We have recently reiterated our Neutral recommendation on
Hudson City Bancorp Inc. (HCBK). The decision
follows our detailed analysis of the company’s fundamentals in
light of the current economic environment and the recent strategic
efforts to offload debt.
Hudson City’s third-quarter 2011
operating earnings came in at 17
cents per share, missing the Zacks
Consensus Estimate of 18 cents as well as the year-ago quarter’s
earnings of 25 cents per share. The company reported an
operating income of $84.2 million
compared with $124.6 million in
the prior-year quarter.
Hudson City’s operating earnings
were primarily affected by lower
interest and dividend income, substantial
decrease in non-interest income and
increased non-interest expense, which were partly
offset by lower interest expense and reduced provision for loan
losses.
Recently, 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 company paid off $4.3 billion debt as part of its effort to
restructure the balance sheet. The company expects restructuring
transactions to have no effect on regulatory capital ratios, but
boost the net interest margin by as much as 20 basis points for the
first quarter of 2012 from the third quarter 2011 level of
1.97%.
Similar restructuring efforts led to an improvement in the net
interest margin in the second quarter of 2011. We believe that such
efforts would support the company’s growth strategy and enable it
to compete in the residential mortgage marketplace going
forward.
HudsonCityinvests primarily in mortgage-backed securities issued
by Ginnie Mae, Fannie Mae (FNMA) and
Freddie Mac (FMCC). The company also invests in
other securities issued by government-sponsored enterprises
(GSEs).
Recent market proceedings and the United States government’s
participation in both mortgage markets, through GSEs, and the
maintenance of low market interest rates, resulted in an
environment that has made its balance sheet less responsive to the
existing market conditions.
In an extensive low interest rate environment, Hudson City has
hastened prepayment 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 re-price during this extended low rate
environment, have resulted in interest rate risk and margin
compression concerns for the company.
Consequently, the company’s calls of securities in its
investment portfolio and mortgage pre-payments have provided it
with excess liquidity. However, with expectations that the normal
interest rate environment will not return until 2013 coupled with
the regulatory atmosphere, the company has lesser choice for
redeploying this excess liquidity. Therefore, Hudson City found it
appropriate to reduce its higher-cost debt.
Though the restructuring effort is encouraging, the upfront
costs associated with it cannot be ignored either. Hudson City’s
first-quarter 2011 results were significantly impacted by the
balance sheet restructuring transaction and resulted in the company
reporting a loss in the quarter.
The recently announced restructuring, Hudson City, is also
projected to have a negative impact of about $440.7 million or 89
cents per share on fourth-quarter after-tax earnings, and
consequently result in a loss. While its dividend strategy was
impacted last time and the company slashed the quarterly dividend
from 15 cents to 8 cents per share, this time its dividend strategy
is likely to remain untouched.
However, this debt pay off is a strategic fit for Hudson City.
Further, the company's strong business model, solid capital
position and conservative underwriting will boost its financial
position. Yet, unfavorable interest rate environment, sluggish
economic recovery and uncertainty surrounding the new and
anticipated regulations are the primary headwinds.
HudsonCityis scheduled to report its fourth quarter and full
year earnings results before the market opens on January 25, 2012.
According to the Zacks Consensus Estimate, the company is expected
to report a loss of 74 cents in the fourth quarter.
HudsonCitycurrently retains its Zacks #2 Rank, which translates
into a short-term ‘Buy’ rating. However, considering the
fundamentals, we have reaffirmed our 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
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