Hudson City Bancorp (HCBK) showed up on our new 52 week low list on Friday. To take a look at the others, look at Weekend Research: 17 Stocks Hitting New Lows on January 21, 2011.
The stock was trading above $13 until they released earnings before the market opened on January 19. At first blush, investors were happy with the $0.25 Q4 EPS report, beating expectations by $0.02. Very quickly, though, problems became apparent which led to a drop in the stock price of nearly 15%.
Hudson City Bancorp is a New Jersey-based thrift. Their primary focus is on residential real estate mortgages, while also providing other consumer products to customers as a source of funds. Their loan portfolio is heavily into one-to-four family residential first mortgage loans. This segment of the market has had a particularly tough time since the real estate crisis began, but Hudson City has been extremely conservative in their underwriting and purchases in the MBS market and does not own sub-prime loans.
The low interest rate environment has caused Hudson City a lot of problems and has provided an opening to its competitors. Now that the banking environment is beginning to normalize, less of a premium will be given to historically conservative operators like Hudson City.
Analyst downgrades helped the stock price drop over the last few trading days. FBR Capital cut the bank to underperform from market perform, citing falling EPS and a likely reduction in tangible book value. Barclay’s Capital downgraded to market weight from overweight. Sandler O’Neill kept the bank at hold, but cut 2011 EPS estimates to $0.68. S&P also cut EPS 2011 estimates to $0.93. On the other hand, Zacks Investment Research upgraded Hudson City from underperform to neutral with a $14 price target just a few days before the release. Ouch!
HCBK is a bit unique in that their non-performing loans are actually increasing slightly, while most other banks are seeing them decrease. This is primarily a testament to their loan quality, which was much better than their competitors through the crisis. Good for them then, not as good for them now. Net charge-offs are still low, though, at .33%.
Those slight increases aren’t the problem, though. Banks such as Bank of America (BAC), Citigroup (C), and J.P. Morgan (JPM) can rely on limited loan growth over the next few quarters as long as they can reduce their reserves because of a drop in non-performing loans. Hudson City, though, because of their loan quality, must rely on growth. Apparently this growth isn’t occurring. Fannie Mae and Freddie Mac have crowded out the mortgage market and negatively impacted their ability to grow. This is why expectations are that their EPS will be lower in 2011 than in 2010, and lower again in 2012.
This reduction in earnings will bring their dividend into question. Hudson City is unique in that they’ve still got a large payout yielding 5.3%. Great for income investors, but potentially a problem as their earnings drops. Some analysts are predicting that dividend will be cut. Although the company is issuing its next regular dividend in February, they did make a remark about right-sizing their earnings with their dividend. Since going public they have never cut their dividend, which is remarkable, but there is a strong possibility that streak will end. If you’re looking at HCBK just for the dividend, buyer beware.
How are the future prospects? Ironically, better times for the economy have not been better times for Hudson City. The interesting thing to watch, though, will be how the federal government deals with the GSEs, i.e., Fannie, Freddie, and FHA. If, as I suspect, the government at least partially gets away from these guarantees, then Hudson City will benefit.
However, even if this plays out as I believe, it may be more than a year away. It would be difficult to imagine a major shock with the GSEs while the housing market is still in shambles. I don’t know if this is baked into HCBK’s stock or not. I typically hate to say this, since uncertainty can often be an investor’s best friend, but I’d feel a lot more comfortable seeing how this plays out and staying away from the stock. Alternately, you can make a bet on management here and say that they’ll figure out a way to make this a positive.