Morningstar | Rate Cuts Present Surmountable Headwinds For M&T; FVE $154. See Updated Analyst Note from 18 Jul 2019
Narrow-moat-rated M&T Bank posted a lukewarm second quarter, and management signaled a more challenging operating environment going forward due to higher deposit costs, noninterest expenses, and lower asset yields due to expected rate cuts. Earnings per share grew 2.4%, and M&T delivered a top-tier 18.8% return on tangible equity. Strength in mortgage banking fee income, aided by lower yields on the 10-year treasury, offset weakness in interest income, which led to preprovision total revenue growth of 6%. After pricing in three rate cuts, we are reducing our fair value estimate for M&T Bank to $154 per share. We see M&T as a high-quality regional bank that is facing manageable headwinds.M&T generated substantial deposit growth from mortgage escrow accounts this quarter, which is a positive from a business growth standpoint, but this does impact the deposit base and helped increase the cost of interest-bearing deposits by 10 basis points. Rising funding costs were the major reason why net interest margins declined 13 basis points, which is among the highest NIM declines we’ve seen this quarter. Management indicated that deposits still have room to reprice upwards from unfavorable mix shifts through third quarter, even if we start getting rate cuts by then. We anticipate that M&T will be unable to reprice deposits downwards to offset the effects of a declining rate environment, which we expect will compress NIMs by 15 to 20 basis points.
We anticipate that noninterest expenses will also be a challenge going forward, as the company invests in developing a more robust IT infrastructure. While we appreciate that this investment will likely help keep M&T competitive over the longer term, it will also likely limit the extent to which efficiency ratios can improve.
Credit costs increased this quarter to a still-pristine 20 basis point net charge off ratio. We anticipate that credit costs will normalize at roughly 1.5 times above this level.
M&T Bank is a bank holding company. Through its subsidiaries, the company provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking, asset management, insurance and other financial services. Banking activities are primarily focused on consumers residing in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia and the District of Columbia and on small and medium-size businesses based in those areas. Certain subsidiaries also conduct activities in other areas.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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