Shares of People's United Financial Inc. (PBCT) have recorded a year-to-date return of 24.3%. Impressive organic growth, expense reduction initiatives and strong capital deployment activities of the company acted as the positives behind this growth story, but we are not so optimistic about these positives translating to further price appreciation down the road as there will be significant pressure on its top line.
After analyzing its fundamentals following third-quarter 2013 earnings release, we would suggest to stay invested in it but not to further add it to your portfolio.
Why This Stance?
Though People's United’s third-quarter 2013 operating earnings per share of 20 cents missed the Zacks Consensus Estimate by a penny, it came in higher than the earnings of 19 cents in the prior-year quarter.
Despite the overall sluggish economic environment, People’s United recorded growth in both deposits and loans so far in 2013. Therefore, both loan and deposit balances are poised to grow further in an improving economy.
Further, based on expense savings initiatives and strengthening of the balance sheet, supported by strategic revenue initiatives, the company targets to reach efficiency ratio of 55% in late-2014. Additionally, though People’s United’s operating return on average assets for the first nine months of 2013 was 0.79%, down 12 basis points on a year-over-year basis, improvement is expected in the coming quarters, driven by loan and deposit growth, a stabilized net interest margin, fee income growth and prudent expense management.
However, People’s United’s top-line growth is expected to be sluggish in the next few quarters owing to weak total revenue and net interest margin (NIM) contraction. NIM declined 56 basis points year over year to 3.33% in the first nine months of 2013. Moreover, with the thrust of new banking regulations, there will be pressure on fee income.
Over the last 7 days, the Zacks Consensus Estimate for 2013 and 2014 remained stable at 76 cents and 88 cents per share, respectively. As a result, it carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better performing financial stocks include Teche Holding Company (TSH), WSFS Financial Corp. (WSFS) and Investors Bancorp Inc. (ISBC). All these stocks carry a Zacks Rank #1 (Strong Buy).