MetLife Inc. (MET) announced receipt of the regulatory approval from the Federal Reserve (Fed) and the Federal Deposit Insurance Corp (:FDIC) to deregister as a bank holding company. The company has been aiming to shed its banking status for about two years.
Given the size and scale of its bank operations amid a concerned capital position in times of contingencies, MetLife failed to pass the annual capital stress-test of the Fed, both in Oct 2011 and in Mar 2012. The strict oversight from the Fed had even barred the company’s capital plan of authorizing a stock repurchase program worth $2 billion and hiking its dividend to $1.10 per share from the current 74 cents per share. However, the Fed asked MetLife to submit a refurbished capital plan by the end of Jun this year, after it failed to submit a fresh capital plan scheduled for Jan 5, 2013, before which it missed the deadlines in Sept and Jun last year.
Nevertheless, the company rapidly divested or shut down most of its banking operations last year. Last month, MetLife reached the final phase of exit from the banking business, when the regulators approved the long-pending deal with General Electric Co.’s (GE), a Zacks Rank #4 (Sell), financial services unit GE Capital Retail Bank, and sold its bank deposits worth $6.4 billion. This helped the company file for deregistration of its banking status sooner than expected.
On Tuesday, MetLife reported its fourth-quarter 2012 operating earnings per share (EPS) of $1.25, which modestly beat both the Zacks Consensus Estimate of $1.18 and the year-ago quarter’s EPS of $1.17. Total operating revenue for the reported quarter increased 12% year over year to $18.36 billion and also topped the Zacks Consensus Estimate of $17.22 billion. Operating return on equity (:ROE) stood at 11.3% at 2012-end from 10.1% in 2011.
The upbeat results were primarily due to higher net investment income, premiums and fees that drove the top line, ROE and book value per share. These were partially offset by higher-than-expected operating expenses and higher derivative losses driven by the unfavorable impact of foreign exchange rates and low interest rate.
Share Buyback Yet to be Withheld
While MetLife aims to repurchase shares worth $8 billion in the next 4 years, the company does not expect any buybacks in the next 2 years. This is due to the inflationary pressure and a low interest rate environment, which is expected to remain prevalent over the next 2–3 years.
Subsequently, operating earnings guidance reflects faltering growth in 2013, which is projected in the range of $5.5–5.9 billion or $4.95–5.35 per share. MetLife reported operating earnings of $5.69 billion or $5.28 per share in 2012. Management also expects a cut of about 30 basis points (bps) in the investment portfolio yield in 2013, pegging it at 5.27%. Meanwhile, ROE is anticipated within 10.2–10.9%, below 2012-level and long-term goal of achieving 12–14% by 2016.
We believe that these factors create a stressful growth scenario and pose direct risk to the operating and competitive leverage of MetLife. Nonetheless, the company's capital position remains one of the sturdiest in the industry and is cushioned by a diversified portfolio mix as well as a leading brand, as reflected by its strong book value growth and healthy ratings.
Going ahead, the exit from banking status will help the company better-focus on strategically strengthening its product-mix, particularly in the emerging nations, in order to generate more predictable operating earnings and cash flow. This should also help improve MetLife’s risk profile and enhance free cash flow, which could then be used to enhance shareholders’ return.
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