DBRS Confirms People’s United Financial, Inc.’s at A (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of People’s United Financial, Inc. (People’s or the Company) and its banking subsidiary, including the Company’s Issuer & Senior Debt rating of A (low). The trend for all ratings remains Stable. The ratings action followed a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings reflect its strong New England franchise which is underpinned by significant core deposit funding and better-than-peer asset quality. The ratings also take into account limited non-interest income (24.1% of adjusted total revenues in 2Q12) and below peer efficiency. DBRS is also mindful of the challenges associated with managing recent acquisitions. Including the recent acquisition of 57 branches from RBS Citizens NA, People’s has completed six acquisitions since the beginning of 2010. Positively, DBRS notes that the conversions to date have gone smoothly, expense targets have been met or exceeded and credit has performed better than expected for all of the acquisitions. The challenge for People’s, in DBRS’s view, is to capitalize on the opportunities presented by recent acquisitions and to continue to grow the franchise in its new markets and strive to bring its brand, product penetration and profitability to levels approaching the core Connecticut and Vermont franchises.

Even with numerous acquisitions over the past few years, the balance sheet remains strong. DBRS views People’s capital as robust and of high quality, as it is almost entirely comprised of common equity. The Company’s tangible common equity ratio of 11.5% as of June 30, 2012, remains strong, and is above the median for similarly-rated peers. Moreover, the Tier 1 Common ratio was a solid 13.6% at the end of 2Q12. DBRS sees current capital levels as providing the Company with significant flexibility to pursue acquisitions while growing organically and investing in its various businesses. DBRS has not historically assigned any uplift to the ratings from its robust capital position given the Company’s stated intent to deploy it. Therefore, as that capital is deployed and ratios decline, DBRS does not expect any pressure on ratings as long as capital investments are done prudently.

People’s second quarter results reflected continued positive underlying balance sheet trends as loans and core deposits continued to grow and pipelines remain solid. Even with run-off, People’s reported modest linked quarter loan growth with its originated loan portfolio growing an annualized 11.2% from 1Q12. Meanwhile, deposits grew 3.6% (annualized) in the quarter. The addition of the RBS Citizens branches late in the quarter presents meaningful opportunities for further deposit growth going forward given People’s demonstrated ability to generate deposits, as well as loans, from its in-store branches.

For the quarter, People’s reported net income of $64.8 million, up $6.2 million from 1Q12. On an operating basis, 2Q12 earnings were $67.2 million, up from $60.6 million in 1Q12. The increase in operating earnings reflected higher fee income, lower expenses and a decline in the provision for loan losses. Reported net interest income increased modestly from 1Q12 due to $4.7 million of cost recovery income on acquired loans. On an operating basis, the net interest margin (NIM) declined 12 bps to 3.89%, due in part to lower loan yields. Given the current rate environment further moderate NIM contraction is expected.

People’s NIM continues to compare favorably to peers, reflecting a good asset mix and better-than-peer funding costs. However, the Company is not immune to the pressure on spreads that comes with the current low rate environment. As such, cost control remains an important focus. The Company has various cost cutting initiatives in place and continues to expect operating expenses to be in the $825 million - $830 million range for 2012. That said, based on current expectations for sustained low rates and somewhat slower than anticipated loan growth, the Company pushed back its target of reaching a 55% efficiency ratio to early 2014 from 2013. For the second quarter, People’s reported an operating efficiency ratio of 61.5% down from 63.2% in 1Q12.

The Company’s asset quality remains sound and continues to outperform most of the banking industry. During the second quarter, non-performing assets (excluding acquired loans) declined 7% to $294.5 million, or 1.67% of originated loans plus OREO. Meanwhile, net charge-offs were $13.5 million, or 0.26% of average loans (annualized), up slightly from 0.22% in 1Q12. The $10.6 million provision for loan losses was down from $11.5 million in 1Q12. Loan loss reserves, at 1.00% of originated loans and 66% of non-performing loans at June 30, 2012 remain adequate in DBRS’s view given the consistently low (and better-than-peer) loss rates on the Company’s originated portfolio.
People’s United Financial, Inc., a diversified financial services provider headquartered in Bridgeport, CT, reported $28.1 billion in assets at June 30, 2012.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Alan G. Reid
Initial Rating Date: 26 February 2008
Most Recent Rating Update: 15 July 2011

For additional information on this rating, please refer to the linking document under Related Research.