Morningstar | Slow Asset Growth Constrains an Otherwise Strong 1Q For M&T Bank
Narrow-moat-rated M&T Bank reported a mixed first quarter, in which margin expansion was constrained by anemic asset growth. Diluted earnings per share grew 50% year over year to $3.35, which we think is indicative of strong operational performance in a favorable operating environment. After updating our credit spread and credit cost assumptions, we are raising our fair value estimate for M&T bank to $166 per share from $165.We were impressed with M&T’s balance sheet positioning, but we would have liked to see more balance sheet growth. M&T’s net interest margin expanded by an astonishing 33 basis points from the fourth quarter to over 4% and we agree with management that this is an unsustainable run rate. We anticipate that M&T’s deposits will reprice upwards, which would bring the margin down to the still-impressive 3.9%. M&T’s margin expansion was impressive but was restricted by the 0.2% quarter-over-quarter loan growth. We imagine that the slower asset growth may be influenced by M&T’s high loan-to-deposit ratio, which currently sits at 98%. We expect that this high-margin, low-growth dynamic will largely continue, resulting in a 2.5% net interest income CAGR over the next five years.
Aside from interest income, the bank performed well over the quarter. Noninterest income grew 9% year over year, led by an uptick in mortgage banking revenue. The efficiency ratio decreased to 57.6% from 64% year over year, and we continue to believe M&T is one of the most efficient regional banks.
Turning to credit, the bank had a fantastic quarter. The net charge-off ratio was a mere 0.1%, which is impressive even when considering that M&T has historically done well in this regard. The proportion of loans in nonaccrual declined as well, but criticized loans increased. We anticipate that credit costs will need to increase from this low level, and believe they will normalize at around 35 basis points for this conservative bank.
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.
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