DBRS Confirms People’s United Financial, Inc. 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 and Stable trend reflect its strong New England franchise that is underpinned by stable core deposit funding, solid expense control, and strong asset quality. The ratings also take into account limited non-interest income and the challenge of continuing to improve the operations of their recent acquisitions, as well as their de novo branches in the newer and highly competitive markets of metropolitan New York and greater Boston area. While still strong, DBRS notes that capital metrics are no longer a positive outlier within the Company’s rating category.

Over the past year, People’s has delivered solid loan growth, while maintaining a strong balance sheet. DBRS notes that all six of the Company’s acquisitions completed since 2010 have met or exceeded cost savings targets. Moreover, the acquired loans have performed better than originally expected as well. The Company’s most recent acquisition of RBS Citizens’ southern New York branches is performing well and should break-even earlier than expected. Specifically, at acquisition, the average in-store branch deposits were $4 million per branch and a year later, average deposit balances have more than doubled reaching $9 million, which is ahead of projections. Eventually, management hopes the acquired in-store branches will approach the $44 million in average deposits of its Connecticut in-store branches.

For 2Q13, People’s reported net income of $62.1 million, up from $52.5 million in 1Q13, but down from $64.6 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $62.4 million in 2Q13, up from $57.9 million sequentially. Highlights of the second quarter include positive operating leverage, robust loan growth, solid deposit growth, and continued improvements in asset quality. While the economic environment remains challenging, DBRS expects People’s to continue to deliver above-peer loan growth reflecting investments made in the franchise, as well as solid pipelines.

To help achieve its goal of a sub 55% efficiency ratio in 4Q14, People’s has created an expense management oversight committee (EMOC) to implement strategies to meet expense targets. Positively, the EMOC has already taken out approximately $118 million in annual expenses, or 13% of the estimated annual cost base. DBRS notes that the Company’s efficiency ratio improved to 62.7% in 2Q13 from 64.1% in 1Q13 benefitting from higher revenues.

Constraining the rating, the Company remains reliant on spread income. For 2Q13, fee income comprised 28% of total revenues and is an area of focus. The Company sees opportunities to deepen relationships by offering such products as wealth management, merchant and payroll services, cash management, commercial insurance, interest rate protection, and foreign exchange products.

Asset quality remains strong and improved during the quarter with non-performing loans (NPLs) in the acquired portfolio declining $21.7 million, or 12%, during the second quarter. At $159.0 million, acquired NPLs are down by 33% over the past year. Within the originated loan portfolio, NPLs were 1.18% of loans, while non-performing assets were 1.33% of originated loans, real estate owned and repossessed assets. Meanwhile, net charge-offs (NCOs) were $10.8 million, or 0.19% of average loans and leases, compared to 0.24% in 1Q13. DBRS notes that $4.3 million of NCOs were related to loans with specific reserves established in earlier periods. Overall, 2Q13’s provision for loan losses remained modest at $9.2 million.

Following an aggressive share repurchase plan, the Company’s capital metrics remain strong, but are no longer a positive outlier within its rating category. Specifically, the Company’s tangible common equity to tangible assets ratio was 8.7% at June 30, 2013.

People’s United Financial, Inc., a diversified financial services provider headquartered in Bridgeport, CT, reported $31.3 billion in assets at June 30, 2013.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used.]

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.

Lead Analyst: Michael Driscoll
Rating Committee Chair: William Schwartz
Initial Rating Date: 26 February 2008
Most Recent Rating Update: 9 August 2012

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