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On Dec 24, 2013, we reiterated our long-term recommendation on Hudson City Bancorp, Inc. (HCBK - Analyst Report) at Neutral. Our decision rests on a rise in non-interest income, lower expenses and solid capital ratios. However, these positives were offset by a decline in net interest income.

Why Neutral?

M&T Bank Corp. (MTB - Analyst Report) has agreed to take over Hudson City in a cash and stock deal worth $3.7 billion. Though the deal ran into regulatory difficulties regarding M&T Bank’s anti-money laundering program and was consequently delayed, an agreement was reached between the Fed and M&T Bank recently. However, in Dec 2013, the companies anticipate regulatory approvals to take more time, which would consequently push back completion of the proposed merger. With the deal likely to be completed by the end of 2014, shareholders are likely to benefit from projected synergies of the combined entity.

Additionally, Hudson City’s third-quarter earnings came in at 10 cents per share, in line with the Zacks Consensus Estimate, due to lower expenses and a rise in non-interest income.

Following the company’s third-quarter results, the Zacks Consensus Estimate for 2013 remained at 37 cents per share over the last 60 days. Further, the Zacks Consensus Estimate for 2014 also stayed at 26 cents per share over the same time frame. Hudson City now carries a Zacks Rank #4 (Sell).

Hudson City completed its balance sheet restructuring in 2011, which substantially reduced its higher-cost structured borrowings. Further, Hudson City did not need to avail the aid provided by the government during the financial crisis. Therefore, it has no loans outstanding to the government.

On the flip side, credit metrics at Hudson City have been a matter of concern over the last couple of years. Nonperforming assets have continuously increased over the past few quarters. Moreover, due to the persistent low interest rate environment, Hudson City’s net interest margin has been steadily declining, leading to a decrease in net interest income.

Moreover, an unfavorable interest rate environment, sluggish economic recovery as well as uncertainty regarding the new and anticipated regulations are likely to affect the company’s revenues, going forward.

Other Banks to Consider

Better-ranked banking stocks include Washington Federal Inc. (WAFD - Analyst Report) and Great Southern Bancorp Inc. (GSBC - Snapshot Report). Both these stocks carry a Zacks Rank #1 (Strong Buy).

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