We are reiterating our Neutral recommendation on People's United Financial Inc. (PBCT). 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 capabilities.
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.
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, Preferred Bank (PFBC) retains a Zacks #1 Rank (a short-term Strong Buy rating).
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