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

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 remained Stable. Subsequent to the confirmation, DBRS withdrew the ratings of People’s. The decision to withdraw the ratings was made at DBRS’s discretion.

The Company’s ratings reflect its solid New England franchise, where it has the number five deposit market share, and a sound balance sheet that is supported by strong asset quality. Positively, People’s has reported loan growth for 15 consecutive quarters, and loan pipelines remain strong, especially on the commercial side. Nonetheless, loan growth has outpaced deposit growth pressuring the Company’s funding profile, which is a ratings concern. The ratings also consider limited non-interest income.

Negative ratings implications could arise from further deterioration in the core deposits to net loans ratio, an unexpected decline in asset quality, or an inability to generate consistent positive operating leverage. DBRS views an upgrade as remote at this point in time. However, over the longer term, improved profitability metrics and a higher contribution from fee-based revenues, while maintaining the Company’s sound balance sheet, could have positive rating implications.

People’s has managed expenses well, keeping operating expenses relatively stable over the past two years even while making investments in people, technology, products, and services, as well as keeping up with increasing regulatory and compliance demands. Such investments include adding relationship managers and branches in both the greater Boston area and New York metro area. Moreover, People’s has selectively added talent to strengthen existing but underrepresented businesses including commercial and industrial lending, New York commercial real estate, private banking, mortgage warehouse lending, and wealth management. The Company is now more focused on improving productivity from the teams already in place.

For 1H14, People’s reported net income of $125.4 million, up from $114.6 million in 1H13 driven by higher revenues, which more than offset higher non-interest expenses. However, on an operating basis, which adjusts for one-time items, revenues were down modestly, while operating non-interest expense increased 2% to $418.2 million. Most recently in 3Q14, People’s reported operating earnings of $63.0 million, up from $59.9 million in 2Q14 reflecting modest revenue growth and stable operating non-interest expense. Given positive operating leverage, the Company’s efficiency ratio improved to 61.4% from 61.8% in 2Q14. DBRS expects the efficiency ratio to continue to show gradual improvement, as revenues benefit from the investments made in the franchise, while expense control remains a primary focus.

The Company’s strong loan growth continues to outpace deposit gathering, putting pressure on its funding profile. According to regulatory data, core deposits were only 85.6% of net loans at June 30, 2014, which was significantly below the Company’s peer median of 108.2%. DBRS notes that, excluding non-core brokered deposits, total deposits declined in the seasonally lower second quarter. Improving the funding profile remains a primary challenge for People’s, especially since loan pipelines remain strong.

Credit quality remains strong and continues to support the rating. Specifically, 3Q14 non-performing assets to originated loans, real estate owned and repossessed assets was a manageable 0.92%, while net charge-offs were a very low 0.13% of average total loans (annualized). DBRS notes that the Company’s sound underwriting allowed People’s to remain profitable each quarter during the most recent downturn, unlike most of the banking industry. While People’s has generated strong loan growth over the past several years, including in their newer, highly competitive markets of Boston and New York, the Company’s approach to underwriting has not been altered.

Capital metrics have continued to trend downward over the past year but remain sound. Specifically, capital has been pressured by an aggressive share repurchase program that was completed in 4Q13, a high dividend payout (80.2% in 3Q14), and balance sheet growth. As a result, the Company’s tangible common equity ratio declined to 7.8% in 3Q14 from 8.5% a year ago. Going forward, improving earnings fundamentals should help build capital, as well as lower the payout ratio.

People’s United Financial, Inc., a diversified financial services provider headquartered in Bridgeport, CT, reported $34.8 billion in assets at September 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: Roger Lister
Initial Rating Date: 26 February 2008
Most Recent Rating Update: 8 October 2013

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