We are maintaining our Neutral recommendation on
People's United Financial Inc.
). The recommendation is based on the company's detailed analysis
of first-quarter 2012 earnings and its cost-cutting
In April, People's United reported first-quarter 2012 operating
earnings per share of 18 cents, missing the Zacks Consensus
Estimate by a penny. However, earnings compared favorably with 17
cents per share, reported in the prior quarter. Lower revenue due
to reduced net interest income and non-interest income were the
negatives for the quarter. However, a fall in non-interest expenses
reflected better expense management and improved credit quality
acted as tailwinds.
People's United has implemented a number of cost-cutting
initiatives in order to increase its recurring operating income.
Management expects to bring down expenses during the course of 2012
from $872 million in 2011, and aims to reach targeted full-year
operating expense base in the range of $800 million to $830
million, which includes the impact of the Citizens branch
transaction. With such strategic efforts, the company hopes to
achieve efficiency ratio of 55% by mid-2013. Such measures are
expected to improve its bottom line in the upcoming quarters.
The company aims to maintain a strong capital deployment
activity in order to instill the confidence of clients, investors,
bank regulators and stockholders. In mid-April, it increased its
quarterly dividend to 16 cents per share from 15.75 cents.
Moreover, it paid $54.9 million as common stock dividends and
repurchased shares worth $56.4 million during first quarter of
2012. This reflects the company's commitment to return value to its
shareholders with its strong cash generating capabilities.
However, the net interest margin has been impacted by the
historically low interest rate environment. The net interest margin
declined to 4.01% in the first quarter of 2012, compared to 4.07%
in the prior quarter, reflecting lower loan yields due to repricing
within the originated loan portfolio. Therefore, given the sluggish
market recovery, we expect the significant disruption and
volatility caused in the financial markets to challenge margins in
the foreseeable future.
Recently, Federal Reserve announced new capital rules for the
U.S. banks. The proposed rules suggest that banks would need to
maintain minimum tier 1 capital ratio of 7.0% of risk-weighted
assets, which is well above the current requirement of around
2%.These rules might limit the flexibility of the banks with
respect to their investments and lending volumes. Moreover, such
strict capital norms may reduce the pace of a worldwide economic
recovery in the short term.
Further, we believe that the risk-reward profile of People's
United is currently balanced and hence, we have reiterated our
Neutral recommendation on its shares. People's United currently
retains its Zacks #3 Rank, which translates to a short-term 'Hold'
rating. Moreover, one of its peers -
Hudson City Bancorp Inc.
) also retains a Zacks #3 Rank.
HUDSON CITY BCP (HCBK): Free Stock Analysis
PEOPLES UTD FIN (PBCT): Free Stock Analysis
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