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Down in the Dumps
Connecticut banks are making money, but their stock prices are mired in the mud. What gives?
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Business New Haven
2/7/2000
By: Kristine Hansen
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Following years of a robust economy and record-breaking stock market performance, Connecticut banks are experiencing a surprising anomaly. The variations in quarterly performance from bank to bank are more easily explained than the apparent dip in stock performance for many of them.
Comparing the 52-week high and low stock prices for several publicly traded banks in the state, many of bank stocks are currently trading at the low end of the 52-week range. Reason would say that if the economy is doing well and bank performance is acceptable, then stock prices would reflect such elements and drive the prices upward.
Bancorp Connecticut reported net income for the fourth quarter of $1.857 million (34 cents per diluted share), compared to $1.320 million (24 cents per share) for the prior year's fourth quarter while Advest Group Inc. reported net income for its first quarter ended December 31 of $5.8 million (63 cents per diluted share), versus $4.7 million (51 cents per diluted share) for the 1998 first quarter. However, both stocks are trading significantly closer to their respective 52-week lows than highs.
American Bank of Connecticut posted increased net income for the three months ended December 31 of $2.695 million (56 cents per share), up from $2.396 million (50 cents per share) for the comparable quarter in 1998. AmBank CFO Floyd Champagne notes that three local banks, “American, People's and Webster are all trading at about 11 times earnings.” That's down from the not-too-distant past. “There was a point where some banks were selling at 12 to 15 times earnings.”
Champagne explains that some banks are perceived as acquirers, and these banks look to growth through acquisitions. Banks that do acquire experience higher expenses due to acquisition costs and consolidation. “Investors in these banks often wait for the acquisitions to be over when they can return to their normal business,” he says.
Due to acquisition/merger-related costs, Hudson United Bancorp reported a fourth quarter net loss of -$17.6 million (-34 cents per share), versus a net income of $24.4 million (45 cents per share) a year ago. First Union Corp. reported fourth quarter net income of $846 million (86 cents per share), versus $993 million ($1 per share) last year, citing assimilation of its acquisitions.
Webster Financial Corp. reported net income for the fourth quarter ended December 31 of $19.6 million (43 cents per share) compared, to $24.1 million (53 cents per share) for the 1998 fourth quarter. The 1999 quarter included one-time acquisition charges related to the acquisition of New England Community Bancorp. The stocks of these banks are all trading close to their respective 52-week lows.
Fleet Boston Financial reported operating income of $726 million (76 cents per share) for the fourth quarter, excluding after-tax merger-related costs of $760 million. The net loss for the quarter, including merger related charges, was $34 million. Despite the bank's positive operating performance, its stock is trading closer to its 52-week low, as well.
People's Bank, whose fourth quarter ended December 31, posted earnings of $26.8 million (44 cents per share), a clear jump above the $9.9 million (16 cents per share) posted during the prior year's final quarter (which included a special tax charge). Without the charge, the 1998 net income would have come in at $27.3 million (43 cents per share). Results for the 1999 fourth quarter were negatively impacted by the dampening of new mortgages and also expenses associated with the expansion of branches. Webster stock is trading at the low end, too.
But is there more to this than the write-off of special charges or slow growth in certain businesses? Jim Kalach, public relations spokesperson for Webster Financial, explains that the falling off of stock price is a national phenomenon.
The stocks are down because “Market expectations are lower,” he says. There “is no factor specific to Connecticut.” Kalach says “basically market expectations have been lowered at a national level.”
Jim Schepker, spokesman for FleetBoston Financial, explains that one of the top questions is interest rates: Will Alan Greenspan raise them? He says that bank stock prices “reflects the concerns of investors for higher interest rates.”
This also impacts loans at both the consumer and commercial level. Home equity loans will be more expensive, and credit card rates higher. Commercial enterprises will be impacted as they pull back on expansion or plant improvements due to added interest costs.
AmBank's Champagne sees the higher interest rates placing pressure on earnings. “Higher rates often precede recession, and that brings on credit quality problems and higher delinquency rates,” he notes.
Another piece to this puzzle is the workforce. FleetBoston's Schepker notes that concern about future growth will impact stock prices. The inability to find workers will curb growth and slow expansion.
And even when employers find qualified people, it may “be required to bid up salaries” he says, and thus “Costs go up.”
Even with a low unemployment rate, Connecticut has been able to keep productivity high through technology. But technology may have been squeezed all that it can, and now “Productivity gains may be jeopardized by the lack of qualified employees and by rising interest rates,” Schepker says.
One institution that has risen above all of the negative indicators is Citigroup. With strong earnings for the quarter of $2.62 billion (75 cents per share), it is trading close to its 52-week high. Perhaps its 300-percent increase in fourth quarter net income from $677 million (19 cents per share) and the company's diversification, along with the ability to grow earnings, may entice investors to pay higher prices for the stock.
Recent performance of Connecticut banks has been affected by one- time merger related charges, softness in certain businesses and acquisition activity. With the question of higher interest rates unanswered, investors in Connecticut banks may need to wait it out. Increases in interest rates may very well affect the bottom line and, as Webster's Kalach summarizes, “The fluctuation in interest rates is tempering people's expectations of future growth rates.”
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