People's United Financial Closing Out With Some Soft Notes

 

The pending acquisition of People’s United Financial (PBCT) by M&T Bank (MTB) is far and away the most important driver for PBCT shares now, and with shareholder approval in hand, all that remains is regulatory approval. Given that there’s no reason to expect regulators to block the deal, investors can reasonably expect a close before year end – likely early in Q4, though an earlier close would be at least a possibility.

I continue to believe that that the acquisition by M&T Bank is a good outcome for People’s United shareholders. It’s inarguable that M&T Bank shares have declined since the merger announcement (by about 7%), but I believe M&T Bank shares are undervalued by a market more focused on near-term pre-provision earnings leverage than longer-term opportunities to drive cost and lending synergies from the People’s United deal and to boost lending share in core markets by leveraging IT-enabled services that smaller community banks cannot match.

Based on my short-term fair value estimates of M&T Bank, I believe People’s United shares are worth around $16.50 to $17.30, with People’s United offering a very modest (around 1%) discount to the implied value of the deal.

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People's United Financial Closing Out With Some Soft Notes

M&T Bank Acquires People's United In An Attractive Win-Win Deal

In several articles over the years I have mentioned M&T Bank (MTB) and People’s United Financial (PBCT) together, as although M&T is a much larger bank, they are geographic neighbors, they share a similar credit and operational culture, and they have both served their shareholders relatively well over the years with what I’d call an “opportunistically conservative” model.

On Monday those ties became much closer, as M&T Bank and People’s United announced a merger wherein M&T will acquire People’s United in an all-stock deal. While I’d run the numbers on a possible merger here before, I had thought that People’s United would likely prefer to remain independent and pursue its own value-added M&A strategy over time. But in a difficult environment for organic bank earnings growth, I think the M&T opportunity was too much to pass up.

On a pro forma basis, I like this deal. People’s United shareholders are getting more than I think the bank was currently worth on a standalone basis, and they get to participate in the upside of the merged entity if they wish. M&T finds a good use of capital, eases some of the growth worries I had, and improves its franchise by essentially replicating it in New England with an excellent cultural fit.

 

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M&T Bank Acquires People's United In An Attractive Win-Win Deal

Weak Spreads And Loan Growth Hamstringing People's United Financial

As investors have grown more comfortable with the economic outlook for 2021 and the credit outlook for banks in this year and beyond, more conservatively-positioned banks haven't fared as well. Like M&T Bank (MTB), People's United Financial (PBCT) has been a bit of a laggard recently, and for largely the same reasons - weak near-term pre-provision growth prospects and likely more limited opportunities to supplement organic growth opportunities with advantageous M&A.

I think People's United management is doing about the best that can be expected right now, and I'll be curious to see what the bank's new "Business Transformation Office" can achieve in terms of customer service enhancement and longer-term share gains. This is still a bank with a good credit culture, a diversified business mix, and a good M&A history, not to mention a healthy dividend, but with near-term growth challenges and a long-term core growth rate likely to be around 4% to 5%, this looks more like an "okay" idea than a compelling buy.

 

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Weak Spreads And Loan Growth Hamstringing People's United Financial

Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

People’s United Financial (PBCT) isn’t going to win any sprints, but I don’t think that’s why most of its shareholders own the stock. People’s United is a high-quality bank that doesn’t take a lot of chances on lending, but instead chooses to leverage a solid core deposit base in the Northeast U.S. while steadily executing on a roll-up community bank M&A strategy and paying a healthy dividend. I can, and will, quibble about unimpressive long-term tangible book value growth, but steady dividend growth over time is not a bad thing.

The shares haven’t really gone anywhere from when I last wrote about the stock, underperforming the sector, and I’m not all that surprised. People’s United has some counter-cyclical defensive characteristics, but I thought those were already reflected in the share price, and I continue to believe that is the case today.

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Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

People's United's Stability Looking More Appealing Now

When I last wrote about People’s United Financial (PBCT) I had a more or less “yeah, it’s fine … I guess” opinion about the shares, and the stock is more or less in the same place now as it was last quarter, but there was plenty of volatility in between, with a sharp 15% drop to ($14), a rally, another drop, and then another rally. That’s a surprising amount of share price volatility for a company whose management prioritizes smoothing out the operational performance.

I spent some time over the past weeks reevaluating People’s United in the context of its past performance and current valuation. Although the long-term lack of exceptional tangible book value growth is still an issue, I probably haven’t given the bank enough credit for its more defensive characteristics, and I’d note that other banks with strong defensive attributes like Commerce Bancshares (OTC:CBSH) and U.S. Bancorp (USB) can enjoy more robust valuations than their growth rates would otherwise seem to support.

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People's United's Stability Looking More Appealing Now

Always-Reliable People's United Financial Executing To Plan

People’s United Financial (PBCT) is an exceptionally reliable, consistent bank – quarterly earnings rarely deviate more than a couple of pennies from expectations and PBCT management has been uncannily accurate in projecting its asset sensitivity over time.

What’s also reliable and consistent is the lack of value-added growth – although the company’s 15-year tangible book value per share growth record isn’t bad (8% annualized growth), the 10-year record is poor (down 1.5%), and the bank basically never earns my estimate of its cost of equity (the highest reported return on equity in the last 15 years is 10.1%). With that, it’s not so surprising that the bank’s performance over the last 5 and 10 years is lackluster, trailing the regional bank average by about 3.5%/year over the last five years and more than 8%/year over the last 10 years.

I like the company’s decision to remix its loan book and focus on growing its higher-yielding leasing business, and I don’t have any particular objection to the United Financial Bancorp (UBNK) acquisition, though I have to wonder about so many bank management teams I respect noting sub-optimal returns from serial M&A, particularly in the context of the less-than-stellar performance record from People’s United. The shares do look a little undervalued and pay a decent dividend, but history shows a pretty good tie between tangible book value growth and shareholder value growth (total returns), and I’d like to see TBVPS growth become a bigger priority here.

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Always-Reliable People's United Financial Executing To Plan

Conservatism And Active M&A Remain Issues At People's United

The word lackluster doesn’t really do justice to the frustrating performance from People’s United Financial (PBCT) over the past decade, as the negative return dramatically lags regional bank indices at individual comps like Signature (SBNY) and M&T Bank (MTB), though BankUnited (BKU) and New York Community (NYCB) do have similarly dreary long-term returns.

The problem, I believe, is an ongoing conservatism on the part of management, which depresses yields and profits, and an ongoing willingness to make TBV-dilutive transactions; over the past decade, People’s United has seen 2% annualized contraction in tangible book value per share, while its Northeast peers have grown TBV/yr at a rate of around 5% to 6% on average.

The bull argument is that all of these acquisitions will eventually produce value through scale and improved growth opportunities across a bigger footprint, not to mention the idea that the company’s conservatism will show its merits when the cycle turns sour. I can appreciate a good conservative story (like Commerce Bancshares (OTC:CBSH) ), but with People’s United not looking all that cheap, I can’t say I find the shares all that exciting.

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Conservatism And Active M&A Remain Issues At People's United

Quality And Conservatism At People's United Comes At A Cost

There’s a lot to like about People’s United Financial (PBCT). A leading bank in New England (#4 in deposit share), People’s United services a client base with well above-average household income and has maintained excellent full-cycle credit quality versus its peers. The bank has also had solid success in expanding its lending franchise into the New York and Boston metro markets and has produced some good long-term C&I loan growth numbers. I’d also note that the bank pays a fairly attractive dividend and operates with a conservative financial structure.

There are also things that aren’t so good about People’s United, though, including the company’s persistent below-peer profitability and more limited growth prospects. Loan growth is looking more challenging in 2018 and the bank’s asset sensitivity may not be worth as much if we’re closer to the end of the rate cycle. People’s United has long underperformed regional banks as a group, and while I do see some value here, this is a tougher call given the more diminished growth prospects that I see.

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Quality And Conservatism At People's United Comes At A Cost

Investopedia: First Niagara Needs To Lever Market Share Into Better Returns

Market share isn't everything. If a company can't take strong market share and use it as a tool to generate superior internal financial returns, shareholders will never benefit. In the case of First Niagara (Nasdaq:FNFG), management has been quite willing to launch deals to build share in its core northeastern U.S. markets, but these operations have yet to deliver truly compelling financial or share returns for investors.

The question, then, is whether First Niagara can start driving better results, or whether investors are better off with other bank companies such as M&T Bank (NYSE:MTB), PNC Financial (NYSE:PNC) or People's United (Nasdaq:PBCT).

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http://www.investopedia.com/stock-analysis/2013/First-Niagara-Needs-To-Lever-Market-Share-Into-Better-Returns-FNFG-MTB-PNC-RBS0115.aspx

Investopedia: Can People's United Get Ahead Of The Curve?

It can be frustrating for investors to own high-quality, low-risk assets in a "risk-on" environment, and that certainly seems to be true of late in banking. While investors in riskier names such as Bank of America (NYSE:BAC), Synovus (NYSE:SNV) and Regions Financial (NYSE:RF) saw sizable gains in the stocks, investors in the more conservatively run People's United Financial (Nasdaq:PBCT) had a significantly different 2012 experience. Given that this company is unlikely to find ways to deploy substantial amounts of capital in 2013, the sluggish yield curve could point to another tough year for investors.

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http://www.investopedia.com/stock-analysis/2013/Can-Peoples-United-Get-Ahead-Of-The-Curve-PBCT-C-TD-BAC0114.aspx