On Wednesday’s Mad Money, Jim Cramer invited the CEO of Hudson City Bancorp (HCBK) Ron Hermance to discuss the company’s third quarter results. The results were an example of the consistency as the regional bank reported EPS of $.27, which was one cent better than expectations and two cents better than last year’s results. Hudson City Bancorp is regarded as one of the most conservatively managed banks in the market, a trait which seems to have been counted against them in the rally of the last 7-plus months.
“I look at Hudson City, HCBK, for you home gamers. Here is one of the, if not the most responsible lender in the business, hardly any bad loans. They actually made you money in 2008. This year, it’s left in the dust. It’s down 24% in the last twelve months. What’s wrong with the picture? It beat the earnings estimates by a penny…On the call, he talked about how Hudson City increased loan originations by $1.7 billion. Non-performing loans were 1.4% of total loans; half the rate of its peers. No exposure to commercial real no sub-prime loans. No option arms. $30 billion of good old fashioned mortgages…” — CNBC’s Mad Money 10/21/2009
The tendency towards conservative management of Hudson City can be seen in some of the old-fashioned banking metrics, which for many other banks are barely even mentioned these days (click chart to enlarge). Net interest income increased 28% to $326 million in the quarter, and deposits grew at 6.6% in the quarter. Like Cramer, we are surprised by the market’s lack of interest in a regional bank with so much going for it. In recent months, investors have been extremely eager to snatch up stock in government mandated capital raises, but when it comes to a bank that is slowly and steadily gaining market share and has very few problems, it has declined year to date. HCBK has fallen more than 17% year to date, while the financial sector as measured by the iShares IYF is up 16.5%.
In contrast to many of our ratings on financial shares at current levels, Ockham is maintaining our Greatly Undervalued rating on Hudson City. The quality management of this company and their ability to stay the course through the credit crisis will eventually be rewarded by the market. We believe the solid fundamentals of the stock would make this a $20 stock or more. There is significantly less risk in this bank than probably any other major bank, and their CEO believes that the conventional wisdom regarding New York City is probably too bearish. With a multiple below 13x and a dividend yield around 4.5%, we firmly believe this investment will start to attract some attention as quality becomes more of a premium.