adminSix months ago, a bit before first quarter earnings, I called out M&T Bank (NYSE:MTB) as a good safe haven stock in the troubled banking sector. My view was based on a combination of factors, including strong liquidity, a “Main Street” business skew that left it leveraged to a still-healthy economy, a good underwriting track record, and a strong core deposit franchise, not to mention ongoing merger synergy opportunities. Since then, the shares have been a relative outperformer, outperforming regional banks by about 3% and larger banks by closer to 10%.
While I’m not as bullish on the whole “Main Street” bank thesis now that the economy is cooling, I still like what M&T has to offer. There are some negatives here, including a surplus of capital that is not being deployed into higher-earning assets (the price of a more conservative positioning), some regional economic risks, and the company’s outsized exposure to commercial real estate (CRE), but I see all of these as manageable.
With long-term core earnings growth below a bit below 4% still supporting a fair value close to $160, and short-term metrics backing a fair value above $150, I think this is still a good name for investors who worry about missing the turn in banking but want to sleep well at night.
Strong Results From A Strong Bank
I thought that M&T Bank delivered an underrated strong quarter with its third quarter results, particularly taking into account the steps the bank is taking to manage/reduce risk.
Revenue rose more than 4% year over year and fell about 2% quarter over quarter, beating expectations by about 2% (or around $0.20/share). Net interest income rose almost 6% yoy and fell a little more than 1% qoq, beating by more 2% and around $0.02/share. Net interest margin declined 12bp qoq to 3.79%, but that was still enough for a 10bp beat and I’d also note that 3.79% is a pretty strong result for a bank of this size. Earning assets grew a little less than 1% sequentially, coming in about as expected.
Non-interest income declined less than 1% yoy and about 3% qoq, with both mortgage banking (down 2%) and trust (down 10%) weaker sequentially. This was straight in line with expectations.
Operating expenses rose almost 5% yoy and declined a little more than 1% qoq, missing absolute sell-side average estimate (and stripping away $0.02/share), but did still beat on an efficiency ratio basis (by almost a point). I note that I exclude deal amortization costs from opex, not because I agree with that, but because that’s what the sell-side community does so it maintains the comparability. Pre-provision profits rose 4% yoy and fell more than 2% qoq. This was still good for a 4% beat versus Street expectations, or around $0.18/share.
Core Deposits Are Helping, And Management Is Actively Managing The Loan Book
Loans rose about 3% yoy on an end-of-period of basis (and declined about 1% qoq), almost doubling the growth of the large bank sector, but lagging the overall banking sector by about 1%.
With very slight growth, though, M&T did manage to outgrow the overall banking sector with C&I lending. Management is actively working down CRE exposure, and CRE lending declined almost 2% on a sequential basis against a little less than 1% growth for the banking sector.
As a reminder, for a top-20 bank, M&T is overexposed to CRE in general and to NYC-area real estate in particular. I’m not troubled by the exposure to multi-family at this point, but exposure to office CRE is certainly more concerning at this point in the cycle, particularly as much lower (and more realistic) appraisals are just starting to undermine loan-to-value ratios around the industry. Highlighting that, charge-offs in the quarter were largely driven by four CRE credits (3 offices and 1 healthcare provider), though 90% of criticized loans are still paying.
Loan yields are fine, improving 17bp qoq (to 6.19%), though deposit beta is running ahead of loan beta (but not earning asset beta). NIM isn’t likely to improve again from here, but loan repricings and surplus capital to deploy into selective lending opportunities (like the acquisition of $300M in capital call loans from what used to be Signature) should lead to better than average NIM performance.
On the deposit side, the bank continues to see the repricing and remixing that is impacting the entire sector, and management characterized deposit competition as “intense”. M&T actually had better-than-average performance in deposit-gathering, growing total deposits by 1% qoq and keeping the non-interest-bearing deposit outflow to just 2%. That’s helped control deposit beta, which rose 800bp sequentially to 48% but still compares fairly well to its peer group (about 250bp above the average of similar banks who’ve reported, excluding Citigroup (C)).
At 2.02% and 1.31%, M&T’s interest-bearing and total deposit costs are still quite attractive on a relative/comparative basis, helped by a relatively large skew toward sticky non-interest-bearing deposits (close to 33%). I’d also note that the bank is sitting on significant cash (about 15% of total assets) and has paused buybacks to maintain flexibility and await further visibility on new capital requirement rule proposals.
The Outlook
I haven’t had to do much with my model since my last update, as M&T has delivered pretty consistent results through turbulent and challenging times. I’m looking for around 4% core earnings growth over the next 5 years and a slightly lower growth rate over the next 10. I do expect capital returns to pick up next year, though the wrangling over new capital requirements could drag on and the election year certainly won’t help that process.
Discounting those core earnings back, I get a fair value of close to $160. Given the near-term pressures on the business (I expect earnings to decline by double-digits next year), it’s not surprising that the shorter term-focused multiples-based approaches produce a lower fair value. Still, a range of $143.50 to $160 (using a 9.9x multiple on my FY’24 EPS estimate and a 14.5% forward ROTCE estimate) isn’t bad.
The Bottom Line
Maybe the worst I can say about M&T now is that if banking stocks as a group start catching a bid, say if the Fed signals they’re done tightening and looking to start cutting rates, this name will probably underperform. Still, a rising tide will also lift this boat, and I think the downside protection of the bank’s conservative positioning (apart from the CRE weighting) and the solid upside make it still worth owning.
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