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We are maintaining our Neutral recommendation on People's United Financial Inc. (PBCT - Analyst Report). The recommendation is based on the company’s detailed analysis of first-quarter 2012 earnings and its cost-cutting initiatives.

In April, People's United reported first-quarter 2012 operating earnings per share of 18 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with 17 cents per share, reported in the prior quarter. Lower revenue due to reduced net interest income and non-interest income were the negatives for the quarter. However, a fall in non-interest expenses reflected better expense management and improved credit quality acted as tailwinds.

People’s United has implemented a number of cost-cutting initiatives in order to increase its recurring operating income. Management expects to bring down expenses during the course of 2012 from $872 million in 2011, and aims to reach targeted full-year operating expense base in the range of $800 million to $830 million, which includes the impact of the Citizens branch transaction. With such strategic efforts, the company hopes to achieve efficiency ratio of 55% by mid-2013. Such measures are expected to improve its bottom line in the upcoming quarters.

The company aims to maintain a strong capital deployment activity in order to instill the confidence of clients, investors, bank regulators and stockholders. In mid-April, it increased its quarterly dividend to 16 cents per share from 15.75 cents. Moreover, it paid $54.9 million as common stock dividends and repurchased shares worth $56.4 million during first quarter of 2012. This reflects the company’s commitment to return value to its shareholders with its strong cash generating capabilities.

However, the net interest margin has been impacted by the historically low interest rate environment. The net interest margin declined to 4.01% in the first quarter of 2012, compared to 4.07% in the prior quarter, reflecting lower loan yields due to repricing within the originated loan portfolio. 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.

Recently, Federal Reserve announced new capital rules for the U.S. banks. The proposed rules suggest that banks would need to maintain minimum tier 1 capital ratio of 7.0% of risk-weighted assets, which is well above the current requirement of around 2%.These rules might limit the flexibility of the banks with respect to their investments and lending volumes. Moreover, such strict capital norms may reduce the pace of a worldwide economic recovery in the short term.

Further, we believe that the risk-reward profile of People’s United is currently balanced and hence, we have reiterated our Neutral recommendation on its shares. People's United currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold’ rating. Moreover, one of its peers - Hudson City Bancorp Inc. (HCBK - Analyst Report) also retains a Zacks #3 Rank.

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