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Rising Rates to Support People's United (PBCT) Q4 Earnings

Zacks Equity Research

People's United Financial, Inc. PBCT is scheduled to report fourth-quarter 2018 results on Jan 17. Both revenues and earnings are anticipated to reflect year-over-year improvement.

Before we discuss the factors that could influence the results, let’s take a look at how the company performed in the last reported quarter.

Impacted by elevated expenses and provisions, People's United delivered a negative earnings surprise of 2.9% in third-quarter 2018. However, rising rates and higher fee income were tailwinds.

Notably, People's United delivered positive earnings surprise in one occasion and in-line results in two out of the four trailing quarters, the average beat being 2.04%.

People's United Financial, Inc. Price and EPS Surprise

People's United Financial, Inc. Price and EPS Surprise | People's United Financial, Inc. Quote

Regarding the stock’s performance, shares of the company declined 14.4% for the three-month period ended Dec 31, 2018. Will the upcoming earnings release give a boost to People's United stock? This depends largely on whether or not the firm is able to post a beat in the fourth quarter. Notably, our quantitative model shows that People's United is likely to beat on earnings this season. Here’s why:

The company has the combination of the two key ingredients for a possible earnings beat — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold).

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for the stock is currently pegged at +1.05%. This is a very significant and leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: The combination of People's United’s Zacks Rank #3 and a positive ESP makes us confident of an earnings beat. 

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement.

Factors to Influence Q4 Results

Loan Growth: A modest increase in lending — mainly in the areas of commercial and industrial, commercial real estate and consumer — is expected to have led to improvement in net interest income (NII). However, weakness in revolving home equity loans (due to slowdown in originations as well as refinancing activities) will partially offset this.

Due to heightened competition, driven by bank and non-bank lenders, lower demands and above average payoffs, loan growth has remained below expectations. Therefore, given the impact of these headwinds, mainly in the commercial real estate portfolio as well as the industry-wide slowdown in the home equity market, management is not quite optimistic of attaining its 2018 loan growth goal of 3-5%.

Notably, the fourth quarter historically has been the bank’s strongest quarter in terms of loan originations. Pipelines at the end of the third quarter were strong and management expects continuation of positive results across the businesses which performed well in 2018, including equipment financing and middle market C&I. Therefore, runoff in transactional New York multi-family portfolio for the full year is likely to be higher than the upper end of previous expectation of $350-$400 million. Deposits are projected to be up 2-4%.

Modest Rise in Net Interest Income (NII): Given the influence of rise in interest rates, People's United is anticipated to have recorded an increase in NII. Notably, management’s projections of 2018 NII’s growth in the range of 10-12% is likely to show impact in the quarter to be reported as well. This is based on the expectation of net interest margin (NIM) of 3.05-3.15%, on assumption of two 25-basis-point rate hikes during 2018. Notably, flattening, and sometimes inversion of the yield curve during the Dec-end quarter is expected to have an unfavorable impact on net interest margin.

Fee Income to Escalate: On strong retail banking, fee income might escalate for the bank. Additionally, the company projects non-interest income to be up 3-5% in 2018, the impact of which is likely to be reflected in the Oct-Dec period.

Increase in Expenses: Despite undertaking a number of expense-saving initiatives, People’s United’s operating expenses have witnessed an elevated level. Though the company is focused on optimizing its branch network and has initiated installation of technology to improve efficiencies and reduce costs, escalating expense levels are likely to curb bottom-line expansion.

Other Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat this quarter.

Huntington Bancshares Incorporated HBAN is set to report earnings on Jan 24. The company has an Earnings ESP of +0.32% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank MTB is +0.80% and the stock holds a Zacks Rank of 3. The company is scheduled to release results on Jan 17.

BB&T Corporation BBT has an Earnings ESP of +0.32% and carries a Zacks Rank of 3. It is slated to report its quarterly numbers on Jan 17.

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