People’s United Financial (PBCT) is the holding company for People’s United Bank, a regional bank based in Bridgeport, Conn. Here's a look at People’s United’s core business activities and its recent financial performance, which should help you determine whether its stock is a smart investment.
(Learn more in Holding Company | Video)
Core Business
People’s United is a traditional bank which provides banking services such as extending consumer loans and mortgages, and receiving deposits from individual and institutional clients. These services are delivered through 412 branches, mostly in New England, with an emphasis on the company’s native Connecticut. By the end of 2014, about 61% of the company’s total loans were to New England customers.
(Learn more in All About Banking.)
The bank also offers such services as investment management, life insurance and lease financing through its subsidiaries. These services are less geographically concentrated than the company’s core banking operations. For example, the company estimates that about 97% of its lease financing businesses comes from customers outside New England.
People’s United’s business relies on the difference—or “spread”—between the interest it pays on customers’ deposits and the interest it receives from customers' loans. This basic source of profit is referred to as the company's net interest margin.
Recent Performance
Changes in net interest margin have been a primary driver of People’s United’s financial performance. From the end of 2014 through July, the company’s net interest margin declined to 2.88% from 3.09% on an annualized basis.
(Learn more in What net interest margin is typical for a bank?)
For the most part, the decline was attributable to People’s United’s traditional banking operations, which the company accounts for under its retail banking operating segment. Between 2013 and 2014, net income attributable to retail banking declined by $23.3 million, or 49.2%. The decline was driven by a $34 million (7.4%) decline in net interest income, a $3.1 million (20.1%) increase in the company’s provision for loan losses and a $12.9 million (7.1%) decline in non-interest income. Similar declines occurred between 2012 and 2013, in which retail banking net income declined by $33 million (41%), driven by a $44.6 million (8.9%) decline in net interest income.
The declining net interest margin is primarily the result of extraordinarily low interest rates of recent years. With the federal-funds rate hovering at or near 0% since December 2008, People’s United—along with the banking industry as a whole—has seen a corresponding downward pressure on the interest income from its loan portfolio. In theory, banks could compensate for this declining interest income by decreasing the interest paid on their deposits. In practice, however, this strategy is easier said than done: Lowering rates too quickly risks alienating customers, while doing so too slowly risks further eroding profits. Like many other lenders, People’s United has been caught in this quandary.
Despite these challenges, People’s United Financial has seen its market capitalization bid up significantly. Since trading at about $12 at the start of 2013, the company’s stock has since risen to over $15—equivalent to a market capitalization of roughly $4.79 billion, or roughly 19 times this year’s estimated earnings. The rise in stock price indicates an expectation that the company will benefit from a future increase in interest rates.
The Bottom Line
As the holding company for People’s United Bank, People’s United Financial has been hurt by the low interest rates since the financial crisis. Despite recent declines in net income and net interest margin, the company’s market capitalization has risen substantially over the past several years, which may indicate that market participants expect the company to benefit from an upward movement in interest rates. With many commentators expecting the Federal Reserve to raise interest rates in the near future, People's United Financial may be worth keeping on your radar.
Source: http://www.investopedia.com/articles/investing/102415/why-peoples-united-financial-offers-profit-potential-investors.asp
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