On January 7, we reiterated our Neutral recommendation on Hudson City Bancorp, Inc. ( HCBK - Analyst Report ) based on its strong capital ratios and decline in interest expenses. However, the pressure on net interest income and net interest margin remained the headwinds.

Why the Neutral Stance?

Hudson City’s third-quarter revenues of $206.3 million as well as earnings per share of 12 cents missed the Zacks Consensus Estimates of $221 million and 14 cents, respectively. However, estimates for Hudson City – a bank holding company that provides retail banking services – have been stable over the last 30 days.

M&T has agreed to takeover Hudson City in a cash-and-stock deal worth $3.7 billion. The deal would combine Hudson City’s retail network with M&T’s full-service commercial banking suite and help expanding the premier community banking franchise in the eastern U.S.

Further, Hudson City was not required to participate in the aid provided by the government during the height of the financial crisis, and therefore it has no loans to pay off. Additionally, Hudson City Savings Bank – the company’s only subsidiary – maintains a healthy capital position.

On the flipside, though the restructuring initiatives taken by the company in the fourth quarter of 2011 boosted its net interest margin (NIM) by 42 basis points in the subsequent quarter, it has declined from that level in the recent past. Notably, in the second and third quarters of 2012, NIM has declined to 2.12% and 2.02%, respectively, from 2.15%.

We believe that the current low interest rate environment would compress the net interest margin further from its higher level, which resulted from the restructuring. Moreover, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are likely to serve as the headwinds.

Other Stocks to Consider

Other banking stocks that are currently performing well include Cardinal Financial Corp. ( CFNL - Snapshot Report ) and First Interstate Bancsystem Inc. ( FIBK - Snapshot Report ) . Both carry Zacks Rank #1 (Strong Buy).