Hudson City Bancorp (HCBK: Charts, News, Offers), one of the few fiscally responsible banks which refrained from partaking of TARP funds, has been brutally punished over the past year. Shares were slashed in half, plunging far below book value, after the bank reported quarter after quarter of disappointing (albeit narrowing) losses due to the squeeze of low interest rates. Finally, on December 16, Hudson City announced some encouraging news for shareholders – that it had extinguished $4.3 billion of debt with its existing cash position. The bank’s Tier 1 leverage capital ratio remains extremely secure after the repayments, and is considered to be well capitalized and cushioned from regulatory requirements. Although Hudson City still expects to report a net loss for the fourth quarter of 2011, without the after-tax charge of $440.7 million, or 89 cents per share, from the extinguishment, the bank would have actually reported a profit. This is huge news for Hudson City shareholders, which signals that 2012 will likely be a year of strong recovery as the bank finally bounces back into the black. Although its earnings position is now improved, Hudson City does not intend to increase its dividend, which it slashed by 41% back in April to conserve cash.
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Hudson City has been continually squeezed by low interest rates, which have hurt the appeal of its consumer savings accounts as well as the profits reaped from its loans. The bank has finally taken advantage of these low interest rates, which will likely continue for some time, by repaying as much debt as possible. “We’re doing just what our customers are doing: paying down expensive debt in this prolonged period of depressed market interest rates,” stated CEO Ronald E. Hermance. “We now believe that a more normal interest rate environment will not return before 2013. After reviewing various options to redeploy our excess cash position, we determined that the extinguishment of higher-cost debt was the best use of that cash.” Hermance calls the action “market-driven” and that the interest rate and regulatory climate have “limited” other options for cash investments. The excess liquidity at Hudson City was mainly attributed to calls of securities from its investment portfolio and mortgage pre-payments from customers taking advantage of the current low-interest rate environment. He also reassured investors that Hudson City’s Tier 1 capital ratio remains safe, due to the proportionate reduction of its balance sheet with its charge to earnings. Hudson City now expects net interest margin to increase 20 basis points in the first quarter of 2012, on a year-over-year basis.
Although shares rallied over 6% on the news on Friday, insiders and institutional investors have not expressed confidence in Hudson City over the past half year. SEC records indicate that three Senior Vice Presidents of the bank unloaded significant positions, and five institutional investors – Deprince Race & Zollo, ING Groep (ING: Charts, News, Offers), Jacobs Levy Equity Management, Citadel Advisors and Nuance Investments – sold all their shares of Hudson City with a total value over $45.3 million. In addition, analysts have been decidedly bearish on the stock. Zacks Investment Research ranks the stock as “neutral” with a $6.00 price target. Meanwhile, RBC Capital analysts cut their price target on Hudson City from $8.00 to $7.00 and reiterated their “underperform” rating on the stock.
However, given current developments, not everyone is bearish on the stock. On Friday, research analysts at Stifel Nicolaus upgraded Hudson City from a “hold” to a “buy”. Although prudent investors should probably stay on the sidelines for now, shares could turn around in early 2012 when the bank finally returns to profitability. If the European debt crisis is resolved and interest rates are finally raised, then investors can safely bet that shares will soar. However, macro concerns are likely to weigh shares down in the short term.
Other News About HCBK
Hudson City Bancorp Extinguishes $4.3 Billion of Structured Borrowings
Hudson City erases its debt, taking advantage of low interest rates.
Hudson City Bancorp Shares Upgraded to a Buy Rating by Stifel Nicolaus Analysts.
Analysts turn bullish on Hudson City.
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