People's United Financial Inc. PBCT and its bank subsidiary were downgraded from ‘Stable’ to ‘Negative’ by Moody's Investors Service, a rating arm of Moody's Corporation MCO. However, the rating agency affirmed Baa1 for senior unsecured debt for the company and the long and short term issuer ratings have been retained at Baa1 and Prime-2, respectively.
In addition, People’s United’s primary subsidiary, People’s United Bank, has been affirmed at A1 rating for long-term deposits and Prime-1 for short-term deposits. Further, the standalone baseline credit assessment of a3 for the bank has been maintained.
Rationale behind the Downgrade
The outlook revision came on the back of credit concerns over People's United’s commercial real estate (CRE) portfolio. Growth in the CRE portfolio raises questions regarding the bank’s ability to sustain prudent underwriting among peers, thereby affecting the company's credit profile.
In the third quarter of 2015, People's United’s originated CRE portfolio recorded 9% annualized growth. As of Sep 30, 2015, per Moody’s, People's United still has huge CRE concentration with 3.6 times of its tangible common equity affecting the credit profile. Moreover, elevated CRE portfolio has weakened the company’s core funding profile and capital position as compared with peers.
Conclusion
The rating outlook is valuable for banks since these preserve investors’ confidence in the stock and boost creditworthiness in the market. However, a downgrade in the same lessens investors’ confidence and reflects the company’s weak financials.
The prevalent low rate environment continues to exert pressure on People’s United’s margin, while an expanding cost base is likely to limit its bottom-line expansion in the upcoming quarters. At the same time, recent regulatory issues are anticipated to pose as headwinds for the company’s profitability. However, People’s United’s potential to capitalize on organic growth amid the ongoing economic recovery remains encouraging.
People’s United currently carries a Zacks Rank #3 (Hold). A couple of better-ranked finance stocks are New York Community Bancorp Inc. NYCB and Flagstar Bancorp Inc. FBC. Both the stocks have a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment