DBRS Comments on Q4 Earnings of People’s United Financial, Inc. – Senior at A (low)

DBRS has today commented on the Q4 2008 earnings of People’s United Financial, Inc. (People’s or the Company), given the continued unsettled conditions in the financial markets. DBRS rates the Company’s Issuer and Senior Debt at A (low) with a Stable trend. People’s reported net income of $35.4 million for the quarter, down from $46.0 million in the previous quarter and $46.0 million in Q4 2007. On a sequential quarter basis, earnings were negatively impacted by expected margin compression, higher credit costs and lower core non-interest income. Nonetheless, DBRS notes the results were solid given today’s deteriorating economic environment. With significant excess capital, still strong asset quality and excellent liquidity, People’s remains extremely well-positioned to navigate through this very challenging economic downturn.

The Company remains an outlier in the industry as asset quality continues to hold up very well. Nonperforming assets (NPAs) actually remained stable at 0.64% of loans, REO and repossessed assets in the fourth quarter relative to Q3 2008, but was up from 0.29% in Q4 2007. Meanwhile, net charge-offs (NCOs) did increase, but remain at low levels, particularly relative to the industry. Indeed, NCOs were only an annualized 0.16% of average loans compared to 0.11% for the third quarter, and improved slightly from 0.17% a year earlier. The loan portfolio, including the Company’s shared national credit and construction lending portfolios, are still showing no signs of systemic risk. As a result, the Company expects NCOs in 2009 to be close to what was seen in the fourth quarter, which would still be better than most banking peers.

Being asset-sensitive, the Company’s net interest margin (NIM) declined as a result of the aggressive Fed funds rate cuts experienced during the quarter. As a result, NIM declined to 3.55% from 3.71% in the third quarter. Looking at just the core bank margin, which excludes the excess capital, NIM only fell 5 basis points to 3.94% as asset yields fell more than funding costs. With historically low interest rates combined with a still very competitive market for deposits, DBRS expects NIM to remain under pressure.

On a sequential quarter basis, lower net interest income from margin compression, a modestly higher provision, and higher expenses combined with relatively flat non-interest income led to lower net income. DBRS notes that within non-interest income, weaker wealth management, bank service charges and merchant services were basically offset by two one-time gains. Non-interest expenses were considerably higher, however People’s incurred various one-time items resulting in net charges of $3.3 million and benefited from $3.5 million in one-time items in Q3 2008. Overall, the $35.4 million in net income equated to a return on tangible assets of 0.76% and a return on assets of 0.71%.

On January 1, 2009, People’s consolidated the six separate Chittenden bank charters into People’s United Bank. The banks will operate as divisions of People’s United Bank. The consolidation will lower expenses and complexity.

DBRS notes that People’s chose not to participate in the U.S. Treasury’s Capital Purchase Program and continues to face the difficult environment from a position of strength. With many banks struggling, the Company has seen more transaction opportunities, but has yet to announce another acquisition. Acquiring a commercial bank preferably located between Maine and Washington, D.C. remains the top priority in deploying the Company’s excess capital.

Given the Company’s strong New England franchise that is underpinned by significant core deposit funding, strong asset quality, excess capital and robust liquidity, DBRS believes People’s will to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.