Will Hudson City (HCBK) Disappoint This Earnings Season? - Analyst Blog

Hudson City Bancorp, Inc. HCBK is scheduled to report its first-quarter 2014 results on Tuesday, Apr 29, before the opening bell.

The company closed 2013 on an optimistic note as it delivered a positive earnings surprise of 28.6% in the final quarter. Results were aided by higher non-interest income, no provision for loan losses and lower expenses, partially offset by lower net interest income.

Will Hudson City succeed to surprise in the upcoming release as well? Let's see how things have shaped up for this announcement.   

Factors at Play

Major U.S. equity indexes witnessed an uptick during first quarter, but the overall market remained volatile. The financial institutions faced challenges with weak consumer and corporate activities, lackluster mortgage banking activities and mounting legal costs. Despite having decent fundamentals, Hudson City is likely to see some impact of these negatives in its bottom-line results.

However, we expect its efforts to improve operating efficiency to support its results to a great extent. As the company has been struggling with its net interest income due to a low interest rate environment, it is focusing more on non-interest revenue sources. Non-interest income recorded a sequential rise in all quarters of 2013. We expect results in the upcoming quarters to show a similar trend.

Another positive worth mentioning is that the company has managed to lower its interest expenses in the past couple of quarters through restructuring initiatives. Provision for loan losses also declined steadily since first-quarter 2013, which ended with no provision in the final quarter. Though the company has not indicated anything related to these during the quarter, we do not expect this trend to reverse this time as well, given its continued focus on restructuring.

On the other hand, Hudson City indicated in its 2013 annual report that in the upcoming quarters it will continue to reduce mortgage-related assets that comprised 89.8% of average interest-earning assets in 2013. The move to reduce balance sheet size is an effort to reduce interest rate risk on such assets.

Though the initiative provides a shield to combat the current dismal mortgage scenario, we believe such reduction will reflect a further decline in its income on first mortgage loans and mortgage-backed securities that has already recorded a significant decrease in 2013.

Activities of Hudson City during the quarter were not enough to encourage analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 8 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Hudson City is likely to beat the Zacks Consensus Estimate in the upcoming announcement. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for Hudson City is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 8 cents.

Zacks Rank: Though Hudson City's Zacks Rank #3 (Hold) increases the predictive power of ESP, we also need to have a positive ESP to be confident about an earnings beat.

Other Finance Stocks  

One may consider Lazard Ltd. LAZ as it has an earnings ESP of +1.82% and carries a Zacks Rank #1 (Strong Buy). It is expected to deliver an earnings surprise when it reports its first-quarter results on May 1.

Here are a couple of stocks from the finance sector that beat estimates and our model rightly predicted their performance. Both these stocks had the right combination of elements to post an earnings beat this quarter.

BankUnited, Inc.'s BKU first-quarter 2014 earnings per share of 53 cents surpassed the Zacks Consensus Estimate of 44 cents primarily on the back of growth in non-interest income.

Driven by prudent expense management, First Horizon National Corp. FHN reported first-quarter 2014 earnings per share of 19 cents, outpacing the Zacks Consensus Estimate by 4 cents.