Modestly Lowering Our Fair Value Estimate for M&T Bank as We Take Up Provisions

Equity Analyst

Rajiv Bhatia

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An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

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M&T Bank is a midsize regional bank with operations throughout the Northeastern United States. The bank has a valuable commercial real estate franchise, with much of the rest of its business comprising other commercial-focused (as opposed to retail-focused) operations, although the bank does have retail operations. M&T has a history of good management, good underwriting, and deep on-the-ground relationships. The bank is a solid regional operator.

MTB acquired People's United Bank in April 2022. This move has further expanded M&T's geographical reach in the Northeast, primarily into Connecticut along with Massachusetts and the New York City area. The acquisition expanded the bank's equipment financing-related product offerings. We liked the pricing of the deal and expect that cost savings alone will justify the acquisition. With merger related expenses set to drop to essentially zero in 2023, we're getting a better look at the true expense run rate for the combined entity. After 2023, it will be up to the bank to drive additional revenue growth as new commercial products are cross-sold into newer geographies and as M&T also potentially picks up some new retail customers along the way.

The bank has also recently sold off its insurance brokerage unit and a portion of its fund administration business, moves that we think make sense in what are consolidating industries.

MTB, like many regional banks, derives a majority (roughly two thirds) of its income from net interest income. As such, the bank's earnings are sensitive to movements in interest rates. The remaining one third of revenue comes from different fee sources, including wealth management, deposit service fees, and mortgage fees.

MTB has one of the largest CRE exposures under our coverage; this is once again coming under increased scrutiny. While certain CRE assets (such as office properties and multfamily housing) have come under unique pressure, M&T's underwriting remains solid, and while losses have occurred, they have been very manageable. Going forward, M&T's ability to deal with a slowing NYC CRE market and grow out additional revenue from its recent acquisition will be important.

Business Strategy & Outlook

We believe M&T Bank has earned a narrow moat because it possesses durable cost advantages and switching costs that are consistent with our bank moat framework. Spread-earning banks generally earn moats by paying less interest on deposits, controlling noninterest expenses, and/or managing credit costs better than their peers. These factors lead banks with moats to have durably higher returns on equity than their cost of capital. We also consider the strength of fee-based income streams and overall scale and product scope when we think about competitive positioning for our banking coverage. We assign a 9% cost of equity for all US regional banks and project M&T Bank to easily exceed this hurdle with returns on tangible common equity averaging 14% over our forecast period. Our analysis shows that M&T Bank has built a narrow moat through durable controls in its deposit costs, operating expenditures, and credit costs.

M&T Bank’s low-cost deposit base gives the company a deposit cost advantage, and the bank's strong relationships with customers result in switching costs. Evidence shows MTB retains higher proportions of non-interest-bearing deposits in a variety of interest-rate environments. Further, the bank has a number of strong commercial relationships where deposit pricing can be made in the context of the total relationship. Both of these factors lead us to expect MTB will maintain its durably lower interest costs relative to total deposits.

M&T Bank has historically had strong operating efficiency, which bolsters its narrow moat. M&T’s efficiency is demonstrated through the efficiency ratio, which has consistently been below 60% in most environments. While its costs have risen faster than peers' in the recent past, we believe M&T will continue managing noninterest costs effectively enough and expect that its efficiency will remain within the same range as narrow-moat peers'. We think that the relatively low noninterest expense is a function of the company’s scale and concentration of deposits (nearly 90% of deposits are in MTB’s top 10 metropolitan statistical areas) since noninterest expenses do not scale with deposits. Given its regional focus, we do not expect MTB to seek deposit growth in unproductive areas outside its region.

M&T Bank adds to its moat by underwriting quality loans, thereby controlling credit costs. MTB has one of the best underwriting histories under our coverage and has consistently outperformed peers through multiple downturns. MTB controlled its charge-offs relative to average loans quite well during the financial crisis, even though about half of its loans were exposed to real estate in 2008. MTB’s credit cost advantage is based on the company’s well-established focus on risk-adjusted yield, which was set in place by the late longtime CEO Robert Wilmers. We do not expect this credit culture to change. We will admit that many of M&T's peers have improved in underwriting quality since 2008, and these costs do not tend to be true differentiators except in a serious downturn, so this advantage may be smaller going forward.

From a systemic standpoint, we believe the US banking system has improved over the last decade, as capital levels supporting the banking system are at all-time highs. Further, regulation has become considerably stronger in the past several years. The US banking market is quite fragmented, and MTB must compete with a variety of regional and community banks as well as large money center institutions, although this fragmentation has gradually decreased since the 1990s. While we do view the banking sector as intensely competitive, the largest banks by asset size have generally been able to earn higher returns on equity for the last several decades and still do so today. Our outlook is generally positive from a macroeconomic and political standpoint for the US banking system, as the US is still the world's leading democracy, has increased GDP at a steady pace for years, and maintains the world's reserve currency, all of which contribute to banking stability.

MTB is considered a Category IV bank, and is only subject to biennial stress tests by the US Federal Reserve, is not subject to any leverage ratio requirements, and is also free from more stringent liquidity requirements. The bank must pass $250 billion in assets before triggering additional regulatory requirements.

Narrow

Economic Moat

M&T Bank

Wilmington Trust, based in Paramus, in the U.S. state of New Jersey, was a bank-holding company for Hudson City Savings Bank, its only subsidiary, then the largest savings bank in New Jersey and one of the oldest banks in the United States, with US$50 billion in assets. It is now a fully publicly held entity and a member S&P 500 stock market Index. In 2005, its US$3.93 billion secondary offering of common stock was the largest in United States banking history. At the time, it was also the seventh largest domestic public offering in United States history. wz The bank avoided the excesses of the housing boom and was labeled "best bank of 2007" by Forbes. M&T Bank agreed to acquire Hudson City on August 27, 2012.

Wilmington Trust

Hudson City Bancorp was a bank-holding company for Hudson City Savings Bank, its only subsidiary, then the largest savings bank in New Jersey and one of the oldest banks in the United States, with US$50 billion in assets. It is now a fully publicly held entity and a member S&P 500 stock market Index. In 2005, its US$3.93 billion secondary offering of common stock was the largest in United States banking history. At the time, it was also the seventh largest domestic public offering in United States history. The bank avoided the excesses of the housing boom and was labeled "best bank of 2007" by Forbes. M&T Bank agreed to acquire Hudson City on August 27, 2012.

Hudson City Bancorp

M&T Bank Corp. operates as a bank holding company, which engages in the provision of retail and commercial banking, trust, wealth management and investment services. It operates through the following segments: Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking, and Retail Banking. The Business Banking segment provides services to small businesses and professionals through the company's branch network, business banking centers, and other delivery channels such as telephone banking, Internet banking and automated teller machines. The Commercial Banking segment offers credit products and banking services for middle-market and large commercial customers. The Commercial Real Estate segment includes credit and deposit services to its customers. The Discretionary Portfolio segment consists of investment and trading securities, residential mortgage loans and other assets, short-term and long-term borrowed funds, brokered certificates of deposit and interest rate swap agreements related thereto, and Cayman Islands branch deposits. The Residential Mortgage Banking segment consists of residential mortgage loans and sells substantially all of those loans in the secondary market to investors. The Retail Banking segment offers services to consumers through several delivery channels which include branch offices, automated teller machines, telephone banking, and Internet banking. The company was founded on August 30, 1856, and is headquartered in Buffalo, NY.

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M&T Bank reports robust Q1 performance, eyes loan growth opportunities

M&T Bank's Q1 2023 performance reflects strong revenue growth and effective capital management. While facing challenges in the consumer space and certain real estate portfolios, the company is focused on opportunities in loan growth and real estate underwriting. Overall, M&T Bank remains well-positioned for continued growth and stability.

M&T Bank reports strong Q2 performance amidst margin pressure

M&T Bank's Q2 performance reflects strong revenue growth and robust capital levels, while facing challenges related to margin pressure and commercial real estate valuation. The bank's commitment to local communities and prudent capital management position it well for future opportunities, including potential margin stabilization and financial metric improvement.

M&T Bank reports strong Q3 earnings and cautious approach for growth

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M&T Bank reports strong 2023 performance and strategic focus for 2024

M&T Bank reported strong financial performance in 2023, with a focus on maintaining a strong capital position and openness to strategic acquisitions. The bank is addressing challenges in deposit costs, noninterest-bearing balances, and growing revenue, while also focusing on expense management and strategic investment. Overall, the bank's outlook for 2024 includes expectations for various key financial metrics.

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