DBRS: People’s United Financial’s 4Q13 Delivers Robust Loan Growth; but Hurt by Neg. Op. Leverage

Summary:

• Adjusted revenues declined by 1%, while adjusted expenses increased by 1% resulting in negative operating leverage.
• Annualized loan growth was a robust 20%.
• DBRS rates People’s United Financial, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

Following the release of People’s United Financial, Inc.’s (People’s or the Company) 4Q13 results, DBRS considers the results as solid, but adjusted revenues declined modestly, while adjusted expenses rose slightly resulting in negative operating leverage. Nonetheless, the Company’s net income increased 1.4% sequentially to $59.3 million reflecting robust loan growth and lower loan loss provisioning needs. DBRS notes that the Company’s strong asset quality continues to support the rating.

On an annualized basis, loans grew a robust 20% during 4Q13 primarily reflecting continued growth in commercial real estate and commercial and industrial lending. Deposit growth was solid, but continues to trail loan growth pressuring funding metrics. The Company noted that it plans to raise $2 billion of brokered deposits, which DBRS does not consider as core. If loan growth continues to significantly outpace core deposit growth, the ratings could be pressured.

Given the low interest rate environment, as well as significant investments made in the franchise, the Company has postponed its 4Q14 target of a 55% efficiency ratio to the low 60’s instead. 4Q13’s efficiency ratio increased sequentially to 64.3% primarily reflecting lower non-interest income.

Asset quality remains strong and continues to improve. DBRS notes that half of the 2013 loan loss provision was related to loan growth, not asset quality deterioration. Despite robust loan growth rates, the Company has not altered its conservative underwriting culture by weakening structures.

People’s completed its share repurchase program during the quarter bringing the Company’s tangible common equity ratio to 7.8%, which is now in line with peers, and is no longer a positive outlier.

DBRS rates People’s United Financial, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]