We are downgrading our recommendation on Hudson City Bancorp Inc. (HCBK) to Underperform from Neutral. Though a solid business model and strong capital levels are the upsides, we believe that the elevated levels of credit metrics remain a concern for the company.
The recent regulatory moves are also expected to create pressure on Hudson City’s bottom line. Moreover, the low interest rate environment, which is anticipated to continue in the upcoming quarters, would restrict the company’s margin.
Hudson City’s second-quarter operating earnings came in just a penny ahead of the Zacks Consensus Estimate, primarily helped by lower interest expense, partially offset by an increase in provision for loan losses and lower interest margin.
Credit metrics at Hudson City continue to expand negatively. Higher provision for loan losses, increased net charge-offs and elevated ratio of nonperforming assets to total assets reflect the risks inherent in the company’s loan portfolio. As the economy is recovering at a slow pace, we do not expect the credit quality to experience any dramatic improvement in the near future.
The Reform Act that was signed by President Obama on July 21, 2010, is expected to increase Hudson City’s overhead costs. The company would incur higher FDIC deposit insurance assessments and other new fees and taxes. This in turn would increase the company’s non-interest expenses.
Hudson City is also facing a tough operating situation as a result of the current economic conditions and interest rate environment. This has made growth very difficult to come by and has put net interest margin under pressure. With an anticipation of lower interest rates in the near term, we believe that the pressure on margins will persist in the upcoming quarters.
Though Hudson City remains focused on controlling its expenses and is exhibiting an improving trend in the efficiency ratio over the past several years, we believe that the current challenges dampen investors’ appetite for this stock. Therefore, we have a long-term Underperform recommendation on the company.
Hudson City currently carries a Zacks #4 Rank (Sell), implying a likelihood of downward pressure on the stocks over the next one to three months.
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
Zacks Investment Research
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