Click to enlargeBoth, in my opinion, are likely to benefit by an improving U.S. economy, the recent steep yield curve, and strong franchise positions in their respective regional markets. As always, this not to be taken as investment advice. Each investor is required to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals. The thoughts overall, and specifically with regard to HCBK and PBCT, are meant to be thought-provoking for investors considering the banking sector in their investment plans.
And there are risks. In Morningstar.com's latest report, it noted the following with regard to HCBK:
- A stabilization in home prices and new capital in the financial system could result in increased competition for jumbo loans as the economy improves.
- Competition is fierce for Hudson City's affluent customers.
- Hudson City's limited offerings may not appeal to customers seeking one-stop financial shopping, but additional products would require unwanted new expenses.
- The extremely low interest rate environment has made its core product - jumbo mortgages held on the balance sheet - not very attractive. Consequently, the bank is attempting to keep its balance sheet stable rather than generate growth by adding low-yielding assets.
And with regard to PBCT:
- It will take time to fully integrate the numerous banks now under the People's umbrella.
- The bank completed a second-step conversion to a savings and loan in 2007, raising $3.4 billion in additional equity from the capital markets. People's management team wasted no time in putting the excess capital to work, acquiring Chittenden Bank shortly thereafter ... The company struck again with a bid for leasing firm Financial Federal Corporation in late 2009, and twice more in mid-2010, purchasing New England lenders Smithtown Bancorp and LSB Corp. We believe People's is still on the hunt, and with a 24% equity/asset ratio as of September 30, 2010, the Connecticut company still has plenty of money to spend on expansion. In fact, we think the biggest risk facing shareholders is the possibility that management will overspend in an attempt to quickly deploy its war chest.
- People's current earnings are not covering its dividend; rather, it is a return of the company's excess capital.
For someone (like me) accustomed to assessing risks in emerging markets countries, these cautionary points may not look too bad, but in fact, these are meaningful potholes that could cause a move into regional bank stocks to stumble. On the other hand, if the U.S. economy does in fact start to improve, these two institutions appear to be poised to capture the opportunities in their respective regions.
While these two banks are certainly not right for everyone, and again, each investor must decide that for themselves, in my specific portfolio where U.S. bank risk is generally lacking, I've chosen to bank on them.
(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Disclosure: I am long HCBK, PBCT, C. Additional disclosure: Positions may change at any time without notice.