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Hudson City Bancorp (NASDAQ:HCBK) reported 2Q09 operating earnings of $0.24 per share, one penny above our expectation and two pennies below consensus. HCBK continued to experience strong lending revenue, even though provisions for losses increased and other credit quality metrics worsened.

Despite the stability in the EPS trends, we remain concerned about the relationship of provisions and non-performing assets, as well as the adverse trends with respect to credit quality metrics and regulatory capital ratios. Prior to the conference call, we are adjusting our FY09E EPS and FY10E EPS to $1.04 per share and $1.20 per share, respectively. We continue to view the shares of HCBK as a Hold, though our concerns remain for the industry and this company over the near term.

While the company does not participate in subprime loans, we remain concerned that a virulent type of contagion might creep upwards and negatively impact HCBK’s mortgage loan portfolio at some point. (The recent rate cuts by the Fed to reverse the subprime crisis will take some time.) However, the company has benefited from an improved yield curve.

The negatives with respect to credit quality for the banking industry have yet to be fully realized and should continue to weigh on the industry as home sales continue to wane at this time.

Our new six-month target price of $15.05 per share equates to a P/B multiple of 1.40x our projected book value for 4Q09 of $10.81 per share, and 14.5x our 2009 earnings estimate of $1.04 per share. We view the annual dividend as secure, implying an expected 5.1% total return.

In addition, the quantitative Zacks Rank for HCBK is currently "3," indicating no clear directional pressure on the shares over the near term. Short interest ratio is 1.9 days versus 1.2 days at the time of our last full report.

Source: Hudson City Bancorp Meets Estimates