People's United Stays on Sidelines - Analyst Blog
January 09 2012 - 11:36AM
Zacks
We are reiterating our Neutral recommendation on
People's United Financial Inc.
(PBCT) based
on the company’s better-than-expected third-quarter 2011 earnings.
The earnings of the company also compared favorably with that of
the prior quarter and prior-year quarter.
In October, People's United reported its third-quarter 2011
operating earnings per share of 19 cents, beating the
Zacks
Consensus Estimate by 2 cents. Earnings also compared favorably
with 17 cents per share reported in the prior quarter and 8 cents
in the prior-year quarter.
The modest improvement in results was driven by higher net
interest income, enhanced revenue and lower nonperforming assets and
loans, partly offset by higher non-interest expenses.
Despite an asset sensitive balance sheet, People’s United Bank
continues to pose a modest capital position, with capital ratios
exceeding each of the regulatory requirements. Its tangible capital
ratio and total risk-based capital ratio were 11.8% and 16.6%,
respectively, as of September 30, 2011, far exceeding the
regulatory minimum requirements of 1.5% and 8%, respectively.
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 the company’s 2011 earnings. Further, People’s
United’s acquisition of Danvers Bancorp Inc. in 2011 marks a
platform of growth for the company.
People United’s net interest margin (NIM) has been growing steadily. Despite a
lingering period of low interest rates and pricing pressure in the
market, the company expects the net interest margin to remain above
4% in the upcoming quarters. As of September 30, 2011,
NIM increased
to 4.13% from 3.64% in the prior-year period, supported primarily
by low-cost funding, good loan mix and strong capital levels.
In July 2011, the company adopted certain cost saving
initiatives, including the elimination of selected positions
primarily within corporate functions, non-core lending businesses
and the former Bank of Smithtown. These will likely lead to an
annual cost savings of about $23 million, beginning in 2012.
On the flip side, 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 hurt the business
anytime in future. In July, the Dodd-Frank Act implemented
significant changes in the financial regulatory backdrop, which
would impact all financial institutions including People’s United.
The company expects the Act’s interchange fee provisions to shrink
the interchange fee revenue considerably, beginning in the fourth
quarter of 2011.
Moreover, the current market volatility and limited credit
availability could continue to adversely affect the U.S. banking
industry and the global economies in the foreseeable future, which
will affect People’s United as well.
Overall, People's United is trying to overcome the challenging
economic environment through opportunistic acquisitions and cost
reduction initiatives. The announcement of the acquisitions and
positive earnings reflect its strong capital and liquidity
position. Going forward, growth in loans and deposits are expected
to keep the financials bright. However, the recent regulatory
issues and market volatility might act as headwinds.
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 #2 Rank, which implies a short-term ‘Buy’
rating.
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