People's United: Ready to Pounce - Barron's

 |  Includes: FULT, PBCT, VLY
by: Rachael Granby

If there are potential winners in the credit crisis, Barron's Leslie Norton sees one in People's United Financial (NASDAQ:PBCT). The Connecticut-based regional bank, the largest in New England, has managed to steer clear of subprime loans, has a strong balance sheet, and is so well capitalized that it's looking for acquisitions as other lenders flounder.

Since becoming a publicly traded company in April 2007, People's shares have lost 17% to Friday's $17.06 close. Even so, the company is extremely well capitalized with cash holdings of $2.5B, an impressive 16.5% of assets and 2.75 times what the FDIC considers "well-capitalized." The bank's capitalization and avoidance of subprime loans (it hasn't made a single one) has been key - its stock is down only 6% this year, compared to the 34% loss for S&P 500 Regional Banks index.

People's earnings are understated since so much of its holdings are in low-yielding cash. CEO Philip Sherringham is eager to correct this with a major acquisition. With a purchase, he says, "the bank's earnings could potentially double over the next two to three years. We have a capital base that will allow us to at least double our asset size." Speculation about potential buyout targets include Valley National Bancorp (NYSE:VLY) and Fulton Financial (NASDAQ:FULT).

The 2009 earnings forecast is $0.75 per share vs. $0.57 in 2008. "The stock has about 20% upside," Norton says.


CEO Sherringham told Reuters last week, "We have too much capital." People's isn't shy to deal when it sees an opportunity: On June 28, 2007 People's agreed to buy Chittenden (CHZ) for $1.9B, saying the combined rate of returns was greater than its cost of capital. Still, the deal has some critics, who say it will have to be more mindful next time: "People's acquisition of Chittenden was very expensive. They paid a high price. If in future they continue doing this, that might prove to be a downside for them," Sterne Agee's Matthew Kelley says. Sherringham's response: "I'm loath to fritter away [capital] on a poorly thought-out and poorly timed buyback."

Recently, Jim Cramer called People's "second best - after Hudson City Bancorp (NASDAQ:HCBK)." Other key competitors include Northwest Bancorp (NWSB), The Bancorp (NASDAQ:TBBK), Downey Financial (NYSE:DSL), and First Niagara Financial Group (NASDAQ:FNFG).