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Analyst Blog

On Jul 2, 2013, we reiterated our long-term Neutral recommendation on Hudson City Bancorp, Inc. (HCBK - Analyst Report), primarily based on M&T Bank Corporation’s (MTB - Analyst Report) agreement with the Fed and the expectation of the merger with M&T to be complete in the near term. However, declining asset quality metrics is a negative for the company.

Why Neutral?

M&T Bank has agreed to take over Hudson City in a cash-and-stock deal worth $3.7 billion. The deal ran into regulatory difficulties regarding M&T Bank’s anti-money laundering program, and was consequently delayed. However, an agreement took place between the Fed and M&T Bank recently. With the deal likely to close in the near term, shareholders are anticipated to benefit from projected synergies of the combined enterprise.

We are also impressed with the company’s balance sheet restructuring, which substantially reduced higher-cost structured borrowings. Such efforts will support the company’s growth strategy and enable it to effectively compete in the residential mortgage marketplace, going forward.

Hudson City’s first-quarter 2013 operating earnings of 10 cents per share missed the Zacks Consensus Estimate by a penny. Moreover, this compares unfavorably with the year-ago earnings of 15 cents.

Lower-than-expected results at Hudson City mainly were due to lower revenues, resulting from declining net interest as well as non-interest income. However, decreased expenses and a strong capital position were tailwinds for the quarter.

Over the last 60 days, the Zacks Consensus Estimate for 2013 moved down by 2% to 41 cents. For 2014, the Zacks Consensus Estimate fell 5% to 37 cents over the same time period. Hence, Hudson City currently carries a Zacks Rank #4 (Sell).

Additionally, we are concerned about the company’s net interest margin (NIM), which has been volatile for the past couple of years. Moreover, we believe that with interest rates remaining at near-historic lows, a more intense competition for mortgage loans – due to the involvement of GSEs, together with no notice from the Fed regarding any interest rate rise in the near future – will compress net interest margin further.

Other Banks Worth Considering

Some other banks in the same sector that are worth considering include Provident Financial Holdings, Inc. (PROV - Snapshot Report), and First Pactrust Bancorp, Inc. (BANC - Snapshot Report). All of them carry a Zacks Rank #1 (Strong Buy)

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