We are reiterating our Neutral recommendation on
People's United Financial Inc
). Our recommendation is based on the company's slothful
third-quarter 2012 results. However, its strong capital
deployment activity is rewarding for investors.
Last month, People's United reported third-quarter 2012 operating
earnings per share of 19 cents, in line with Zacks Consensus
Estimate. However, earnings lagged the prior quarter's figure by
a cent. Quarterly results were impacted by higher non-interest
expenses and elevated provision for loan losses. However, higher
revenue, aided by improved non-interest income, was a positive.
In mid-April this year, the company increased its quarterly
dividend to 16 cents per share from 15.75 cents. Moreover, it
paid $164.3 million as common stock dividends and repurchased
shares worth $165.3 million during the nine months ended
September 30, 2012. This reflects the company's commitment to
return value to its shareholders with its strong cash generating
People's United is highly emphasizing on its cost reduction
efforts in order to increase the recurring operating income.
Management expects to bring down expenses in 2012 from $872
million in 2011, and aims to reach targeted full-year operating
expense base in the range of $815-$820 million.
The company targets to reach an efficiency ratio of 55% in
mid-2013 through expense reduction initiatives and strengthening
its balance sheet with the help of strategic revenue initiatives.
However, the continuing low interest environment may bring down
the target in 2014.
However, the net interest margin has been impacted by the
historically low interest rate environment and the company's
continued investment of a portion of its excess capital in
relatively low-yielding short-term investments. Moreover, the net
interest margin declined to 3.82% in the third quarter of 2012,
compared with 3.88% in the year-ago quarter. 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.
Further, weak credit metrics for the last couple of years have
negatively impacted the financial health of People's United with
commercial banking being the worst-hit segment. Despite the
abovementioned facts, the company witnessed reduced provision for
loan losses and lower non-performing assets and loans, in the
third quarter of 2012.
However, the levels of non-performing assets and potential
problem loans are expected to be volatile based on uncertain
economic and market conditions, and the relative sizes of the
respective loan portfolios along with management's success in
resolving problem assets. Therefore, given the current state of
the U.S. economy, and more specifically, the real estate market,
the level of non-performing assets is likely to continue to
remain elevated in the near term.
PEOPLES UTD FIN (PBCT): Free Stock Analysis
PREFERRED BANK (PFBC): Free Stock Analysis
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Moreover, given the sluggish market recovery, we expect
significant disruption and volatility caused in the financial
markets to challenge margins in the foreseeable future.
Regulatory issues also remain a major concern.
People's United currently retains a Zacks #3 Rank, which
translates to a short-term Hold rating. In the same sector,
) retains a Zacks #1 Rank (a short-term Strong Buy rating).