Even the ‘good’ banks are looking at lean times
.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;}
Dear Mr. Berko:
My broker recommends that I buy 500 shares of People’s United Financial Inc., which sells for $18.42, roughly a $9,500 investment. He says the stock has done well in the past five years, that management is acquisition-minded and that this bank has a good balance sheet because it has no subprime loans. He thinks this is one of the good banks and that the stock could move to between $23 and $25 this year as the subprime fiasco begins to wind down. Please give me your thoughts.
D.G., Syracuse, N.Y.
Dear D.G.:
People’s United Financial Inc. (PBCT-$18.42) is a Bridgeport, Conn.-based regional bank holding company with an attractive balance sheet, a strong capital position and, yes, zero subprime exposure. I guess small-town banks from the original 13 states don’t cotton to the breed of bigger Yankee banks that troll the gutters for profits.
Unlike Bank of America, Citigroup, Wachovia and the like, PCBT’s Tier 1 capital, the heartbeat measure of a bank’s health, is almost five times the FDIC’s criterion for “well capitalized.” In fact PBCT’s cash position exceeds 45 percent of the company’s market capitalization. Founded in 1842, this blue-blood bank has 302 branches in Massachusetts, New Hampshire, Maine, Vermont and Connecticut. Its purchase of Vermont’s Chittenden Bank last January should push gross revenues from $893 million in 2007 to about $1.26 billion in 2008 and improve earnings from 51 cents a share in 2007 to an expected 60 cents a share for 2008. And if PBCT management continues to reduce costs and improve economies of scale, the worker bees at Standard & Poor’s believe PBCT can earn 75 cents per share in 2009. The company’s shares trade at 1.2 times its $15.50 book value; its loans equal its deposits; net interest margins are about 3.8 percent, there are 340 million shares out, and the 60 cent dividend, which exceeds 2007 earnings by 9 cents, yields 3.3 percent. Janney Montgomery Scott LLC has a “buy” recommendation on PBCT, Keefe Bruyett & Woods Inc. is neutral, and Standard & Poor’s gives it a five-star ranking and suggests the stock will trade at $20 this year.
People’s United has had a good five year-run. It split twice — 3-for-2 in 2005 and 2-for-1 in 2007 — and a $10,000 investment made in 2005 would be worth $32,000 today. Not bad, that!
The shares have had a good run, as your broker indicated, but most banks enjoyed similar successes during the past five years. However, I’m not interested in this bank’s past, because its future is where its importance lies.
So, at a trailing price-to-earnings ratio of 35 and a dividend payout 20 percent higher than earnings, I would not be a buyer. The investment services following PBCT believe revenues and earnings will rise, but I’m not as sanguine about its share price.
I think PBCT’s loan growth (recent acquisition included) will be in the low double digits this year, and I think that its loan-loss ratio will increase significantly. Banks make money by lending money at rates higher than their money costs. But I don’t see much loan demand this year or next. The consumer is over his bellybutton by half with installment debt, and in inflation-adjusted dollars the consumer is earning less than he did five years ago. He’s really pulling in his horns.
The government says the inflation rate is 5.4 percent, but the real inflation rate is closer to 8.9 percent. The government reports unemployment at 6.1 percent; however, the real unemployment rate is closer to 10.3 percent and rising. The housing market is collapsing, credit card delinquencies are reaching epidemic levels and an increasing number of borrowers are falling behind on their home equity loans. This scenario suggests that PBCT and other banks will not experience meaningful loan growth.
Though there is much good to be said about PBCT, I cannot say that its earnings and its consumer loan growth will be meaningful. That is why I disagree with your broker. The stock will trade around $23. However, the next two years could be good for PBCT to make acquisitions in New Hampshire, Maine and Vermont, build its deposit base and grow its loan portfolio via acquisition. But this year does not look like a good year for you to buy the stock.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2008 Creators Syndicate, Inc.
Trending News
