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MetLife Fixed at Neutral

MET

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We have reiterated our Neutral recommendation on MetLife Inc. (MET - Analyst Report) based on its critical sustainability factor. While the company is gearing up its efforts to shed its banking operations, a delayed submission of its refurbished capital plan to the Federal Reserve is causing uncertainty.

MetLife reported second-quarter 2012 operating earnings per share of $1.33, smoothly outpacing both the Zacks Consensus Estimate of $1.25 and year-ago quarter's earnings of $1.13. Operating earnings escalated 18% year over year to $1.43 billion.

The upbeat results were primarily due to a robust earnings growth across the U.S., Asia and EMEA along with improved underwriting results, higher net investment income, higher-than-expected derivative gains as well as lower-than-expected operating expenses. This was partially offset by lower-than-expected top-line growth across the U.S. and EMEA, particularly led by low premiums growth and continued underperformance from variable annuities as well as low interest rate environment.

The ongoing interest rate volatility hinders the growth proposition in pension and other post-retirement plans leading to higher expenses and reduced profitability. The adverse impacts of interest rate, currency fluctuation and credit spreads have also moderated the growth of annuity operations, sales in corporate benefit funding and investment income in the past few quarters.

Additionally, intense competitive pressures continue to risk the operating and financial leverage, while growth from the ALICO acquisition has moderated and will likely create difficult comps in 2012

Despite being adequately liquid, MetLife has not been able to return wealth to shareholders in its full capacity as the company's comprehensive capital plan has been rejected twice by the Federal Reserve based on the size and scale of its bank operations. MetLife has not hiked its dividend over the past 4 years and has yet to deploy its excess capital efficiently through dividend hikes and recommencement of stock buybacks.

Moreover, the failed result of the Federal Reserve's capital stress test, in March 2012, has hastened management to gear up the divestment of the banking operations. However, the company has yet to submit a refurbished capital plan, although the Federal Reserve extended its deadline from June 2012 to September-end 2012 to January 5, 2013 now. Another rejection in future could gravely raise the risk of rating downgrades.

Nevertheless, MetLife took a significant step, recently, to hasten its long pending deal with General Electric Co.’s (GE) GE Capital Bank by amending the terms of the transaction so that it can evade the regulatory approval from Federal Deposit Insurance Corp. (FDIC). The company now requires the sanction of the Office of the Comptroller of the Currency (OCC).

According to latest modification, GE Capital Retail Bank, instead of GE Capital Bank, will now buy MetLife’s bank deposits. Transacting through GE Capital Retail Bank will make GE Capital less reliant on commercial paper and bond sales, while the fact that it comes under the regulatory purview of the OCC, has significantly cleared the regulatory snags for the successful completion of the deal. Hence, the companies will no longer require the FDIC approval and is thus, expected to close the long overdue deal very soon.

MetLife maintains a diminishing risk-profile with a strong risk-based capital position, ample liquidity and leading market position. Alongside, a financial leverage ratio of 36% and interest coverage ratio of 7.2x at the end of June 2012 remains sustainable.

The company also intends to eliminate some of its debt that is due for maturity in the near future, which shall further improve its debt leverage to about 24% by 2013-end. Higher operating cash flow and improved earnings visibility in the intermediate future also injects optimism in management’s projected ROE growth of 12–14% by 2016.

MetLife’s diversified business mix is distributed globally and benefits from its customer-centric business model. The company is keenly expanding its coverage in the US, while gaining a strong foothold in the emerging economies. Going ahead, management estimates revenue to grow by about 20% per year by 2016 in emerging economies, thereby holding a firm conviction of growth from international operations.

Overall, based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the third quarter of 2012 at $1.27 per share, which is about 14% higher than the year-ago quarter. For 2012, earnings are expected to grow about 5% over 2011 to $5.26 per share. MetLifeis scheduled to release its third quarter financials after the closing bell on October 31, 2012.

Currently, MetLifecarries a Zacks Rank #3, implying a short-term Hold rating, indicating no clear directional pressure on the stock in the near term.

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