Hudson City BankCorp
Hudson City Bancorp is NJ based thrift with nearly $50B in assets and over $27B of net loans. It operates primarily in NY tri-state area and is thought to have very conservative underwriting standards due to non-participation in sub-prime lending and low LTV ratios.
In the past five years bank’s loan book quadrupled to over 27B USD. At the same time provision reserve grew only 47% and now stands at a 39M USD. This is 0.1% of loans outstanding compared to ~1.5% average for other US regional banks. The bank says that their reserves are sufficient given high quality of their loan book and negligible charge offs. 98% of company’s loan book is linked to 1-4 family homes. I will make an argument that the bank has been under provisioning for years and current drop in NY area real estate prices will force it to catch up with significant negative effect on earnings, book value, and share price.
Between 1999 and 2006 HCBK record on net charge offs has been absolutely stellar with write downs never exceeding .002%. This statistic coincides with a period in which NY real estate prices have grown anywhere between 5% and 15% annually. This is very important since 69% of HCBK’s overall loans are in NY metro area.
Before 1999 the picture is somewhat different. Net Charge offs were much higher peaking at 0.04% of overall loans in 1996. During that period NY real estate prices stagnated and grew between 0 and 3%.
The reason that period is relevant right now is the fact that now real estate prices in NY area are actually falling for the first time since early 90s. Since Beginning of ’07 prices fell 9% and decline is likely to continue since economic activity is slowing down, rental yields are below mortgage rates, and unemployment is once again creeping up. In ’07 HCBK charge offs went up 10x and stood at 0.003% of the portfolio. Taking into account that current situation is significantly worse than in 1996 and HCBK’s portfolio is lower quality due to a significant increase in purchased mortgages, I believe that charge offs can easily go up another 10x or more. 1992 level of charge offs, as shown in FDIC filings, suggests a 20x increase to 0.06% of loan portfolio.
At the end of ’07 Hudson City kept a provision reserve of only $34M on a loan portfolio of over $24B. In 2007 bank grew provisions by only 13% while their troubled assets (loans that are past due by more than 60 days) have went up staggering 122%. At the end of ’07 provision/troubled assets ratio stood at 357% - a level much greater than normal 100-120% company has been carrying through the housing boom. HCBK does not report troubled asset levels in their quarterly filings but I seriously doubt this ratio has improved significantly since the company is still keeping provisions at very low level and real estate prices have continued to decline. Last time provision/troubled assets ratio stood at above 300% was 1992. In 1993 HCBK had to double its provision reserve to equal to 0.5% of loans outstanding or 4x greater than current level of provisioning.
In my opinion the company will have little choice but to significantly increase their provisions when they report 2008 annual results. Normal level of provisions for US regional banks is around 1-2% and to bring HCBK provisioning level to 1% level they would have to report a loss equal to 4% of their equity value. While this does not sound like much, I believe it will have a very negative impact on company’s share price.
Despite carnage in broader financial services market, HCBK stock is actually up around 20% in the last year due to believe that company is immune to housing problems and endorsements from people like Jim Cramer. Company is trading at 1.7x book value which is a significant premium to its peers. Analysis of other regional bank stocks shows that whenever company had to significantly increase its provisions its book value multiple fell by approximately 0.8x BV over next 6 to 12 month.
Based on the facts outlined above I believe that HCBK will have to significantly increase its provisions will cause market price to decline by around 40-50%.
In the past five years bank’s loan book quadrupled to over 27B USD. At the same time provision reserve grew only 47% and now stands at a 39M USD. This is 0.1% of loans outstanding compared to ~1.5% average for other US regional banks. The bank says that their reserves are sufficient given high quality of their loan book and negligible charge offs. 98% of company’s loan book is linked to 1-4 family homes. I will make an argument that the bank has been under provisioning for years and current drop in NY area real estate prices will force it to catch up with significant negative effect on earnings, book value, and share price.
Between 1999 and 2006 HCBK record on net charge offs has been absolutely stellar with write downs never exceeding .002%. This statistic coincides with a period in which NY real estate prices have grown anywhere between 5% and 15% annually. This is very important since 69% of HCBK’s overall loans are in NY metro area.
Before 1999 the picture is somewhat different. Net Charge offs were much higher peaking at 0.04% of overall loans in 1996. During that period NY real estate prices stagnated and grew between 0 and 3%.
The reason that period is relevant right now is the fact that now real estate prices in NY area are actually falling for the first time since early 90s. Since Beginning of ’07 prices fell 9% and decline is likely to continue since economic activity is slowing down, rental yields are below mortgage rates, and unemployment is once again creeping up. In ’07 HCBK charge offs went up 10x and stood at 0.003% of the portfolio. Taking into account that current situation is significantly worse than in 1996 and HCBK’s portfolio is lower quality due to a significant increase in purchased mortgages, I believe that charge offs can easily go up another 10x or more. 1992 level of charge offs, as shown in FDIC filings, suggests a 20x increase to 0.06% of loan portfolio.
At the end of ’07 Hudson City kept a provision reserve of only $34M on a loan portfolio of over $24B. In 2007 bank grew provisions by only 13% while their troubled assets (loans that are past due by more than 60 days) have went up staggering 122%. At the end of ’07 provision/troubled assets ratio stood at 357% - a level much greater than normal 100-120% company has been carrying through the housing boom. HCBK does not report troubled asset levels in their quarterly filings but I seriously doubt this ratio has improved significantly since the company is still keeping provisions at very low level and real estate prices have continued to decline. Last time provision/troubled assets ratio stood at above 300% was 1992. In 1993 HCBK had to double its provision reserve to equal to 0.5% of loans outstanding or 4x greater than current level of provisioning.
In my opinion the company will have little choice but to significantly increase their provisions when they report 2008 annual results. Normal level of provisions for US regional banks is around 1-2% and to bring HCBK provisioning level to 1% level they would have to report a loss equal to 4% of their equity value. While this does not sound like much, I believe it will have a very negative impact on company’s share price.
Despite carnage in broader financial services market, HCBK stock is actually up around 20% in the last year due to believe that company is immune to housing problems and endorsements from people like Jim Cramer. Company is trading at 1.7x book value which is a significant premium to its peers. Analysis of other regional bank stocks shows that whenever company had to significantly increase its provisions its book value multiple fell by approximately 0.8x BV over next 6 to 12 month.
Based on the facts outlined above I believe that HCBK will have to significantly increase its provisions will cause market price to decline by around 40-50%.
posted by sgorelik @ 11:17 AM
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