People's United to use excess capital for acquisitions

BANGALORE (Reuters) - At a time when most banks are struggling to shore up their capital levels, Philip Sherringham, chief executive of People's United Financial Inc (PBCT.O), has a different game plan for growth -- use excess capital to buy cheaper banks.

"We have too much capital," Sherringham, who took the helm earlier this year, said in an interview with Reuters, also hinting that the bank would continue to increase dividend.

Sherringham said the bank is betting on inorganic growth as organic growth is limited in the current market scenario.

With $3 billion in excess capital, the Bridgeport, Connecticut-based bank, which expects to double or triple its asset size over the next two to five years, is one of the better capitalized banks in the country.

In April last year, People's raised $3.2 billion in capital through an equity offering. The bank has avoided most of the problems caused by the credit crisis through strict underwriting standards and its minimal exposure to subprime securities.

With an asset base of more than $20 billion, People's is looking at other commercially oriented banks in the Mid-Atlantic and New England.

"People's United is on the prowl for opportunities to acquire distressed or regulator-assisted institutions," Sterne Agee analyst Matthew Kelley said.

The year-long credit crisis has otherwise forced most U.S. regional banks to back away from their expansion plans and shrink their businesses as they strive to mitigate losses and regain investor confidence.

The biggest risk for People's, however, could be integration and pricing of their acquisitions, Kelley said.

"People's acquisition of Chittenden was very expensive. They paid a high price. If in future they continue doing this, that might prove to be a downside for them," Kelley said.

Earlier this year, People's United acquired Chittenden Corp for $1.9 billion, combining one of Connecticut's largest banks with one of Vermont's largest.

The Chittenden deal helped People's United become a regional bank from a local one. "We are not particularly aspiring to become a national bank at this point," Sherringham said.

Cost-savings related to the Chittenden acquisition are not through yet, he said, adding that he expects the integration to be completed by the end of 2009.

The company, which competes with Northwest Bancorp NWSB.O, The Bancorp Inc (TBBK.O), Downey Financial DSL.N and First Niagara Financial Group (FNFG.O), cut 170 jobs earlier this year, but the move was not related to the Chittenden deal, he said.

"At some point, when the integration is complete, you will see more headcount reductions. But there is nothing in the immediate short term," Sherringham said.

People's United shares have fallen about 2 percent so far this year, outperforming the broader KBW Bank Index .BKX which has fallen 25 percent.

DIVIDEND BOOST LIKELY

Despite having plans to use huge amount of capital in acquisitions, the bank still expects to continue raising its dividend, CEO Sherringham said. "Given our earnings capacity, we see no reason to do anything else."

People's United had raised its first-quarter dividend by 12.5 percent to 15 cents a share. The raise came at a time when small- and medium-sized regional banks were aggressively trying to shore up their capital levels by cutting dividend and issuing shares.

Sherringham said the bank stopped any new additions to its mortgage portfolio since the fourth quarter of 2006.

People's United faces less competition on the lending side, with other banks more cautious on preserving capital. However, on the deposit side, it faces competition from banks which are building up on deposits.

"We are not seeing much growth in our deposits because we do not need much growth," Sherringham said.

Sherringham expects a turnaround in the U.S. economy not until at least six months to one year.

"You may see some more bad news before you see good news," he said.

(Editing by Deepak Kannan)