Shares of Hudson City Bancorp (HCBK: Charts, News, Offers) have fallen 34% in the past year, proving that sometimes it just doesn’t pay to play responsibly in the world of banking. At the nadir of the financial crises of 2008-2009, Hudson City’s larger industry peers scrambled to collect the government bailout, or TARP, to avoid a massive collapse of America’s banking system. Yet Hudson City, which has long catered to more affluent clientele in the New York and New Jersey area, didn’t need a government handout – but its shares were ironically brutally punished while the villains of TARP – Citigroup (C: Charts, News, Offers), Bank of America (BAC: Charts, News, Offers), Wells Fargo (WFC: Charts, News, Offers) and JPMorgan (JPM: Charts, News, Offers) – all saw their shares rise to new highs. Shares of HCBK now trade at a mere 0.93 times book value, just barely higher than its March 2009 low of $8.80 per share. Patient value investors should see this opportunity to invest in one of the last honest names in the finance industry, which is merely being pressured by overwhelming pessimism regarding both the small banks sector as well as the financial sector as a whole.
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This week, Hudson City posted a first quarter loss, with a 23% drop in net interest income to $256.4 million. It reported a loss of $555.7 million, or $1.13 per share, a huge drop from profits of $148.9 million, or 30 cents per share, it posted the same quarter last year. This did, however, beat analysts’ estimates by a penny – the EPS consensus was at a loss of $1.14. Low interest rates flattened the bank’s yields on mortgage-related interest-earning assets, as customers took advantage of these lower rates to refinance their mortgages and take out new loans. Non-performing loans, loans which the bank expects to go bad, have also hurt the bank’s bottom line. However, the bank was able to decrease the provision for loan losses, which is set aside to cover estimated losses from bad loans, from $50 to $40 million. Non-performing loans decreased from 2.92% of total loans to 2.82%, while net charge-offs – which the bank does not expect to be able to collect on – decreased from 0.3% of total loans to 0.28%. While these numbers are a slight improvement over last year’s numbers, investors have not been impressed.
To help bump Hudson City back into the black, CEO Ronald Hermance Jr. has announced a 47% dividend cut from 15 cents to 8 cents per share, which is expected to save the bank $138.4 million annually. While this is frustrating for dividend investors, it will help Hudson City get back on track and increase its deeply depressed share price. Regarding the dividend cut, Hermance stated, “We are committed to shareholder value and believe that the current dividend level represents a prudent capital management decision.”
The bank has also announced a restructuring of its balance sheet to alleviate its debt. In April, Hudson City sold $8.66 billion worth of its own portfolio securities and $5 billion of new short-term fixed maturity borrowings – this helped pay off $12.5 billion in company debt. At the time, the bank expected these transactions to impact first quarter earnings by $644 million, or $1.30 per share, which turned out to be a more pessimistic figure than the actual loss. Hudson City hasn’t been able to significantly decrease its loan loss provisions on par with other larger banks, and coupled with its 11% drop in fourth quarter profit, has caused investors to dump the stock in favor of better bets in the financial sector.
Shares of Hudson City, however, are becoming too cheap to ignore. Trading under book value, the stock has very limited downside which will discourage shorts to punish the stock further. However, upside is limited as well as the bank has now eliminated one of the primary reasons to own the stock – its dividend. With a forward P/E of 10 and a negative PEG ratio the stock has nowhere to go but up – but it just might take a couple of years.
Other News About HCBK
Don’t Fret Over Hudson City’s Impending Dividend Cut
Why investors shouldn’t panic about Hudson City.
Hudson City Swings to Loss, Cuts Dividend
Hudson City’s earnings in detail.
Other Stocks in the News
Wells Fargo’s income rises 51 pct; mortgages fall
Wells Fargo rises from the ashes.
Citigroup Inc. In Profits Slump
Citigroup’s stock price might not be going anywhere soon.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
