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Morningstar | Solid 2Q Results for M&T Bank; Raising Our FVE

Narrow-moat M&T Bank reported a 13.32% return on average total shareholders’ equity in the second quarter, much improved from the 9.67% of the year-ago quarter. Rising interest rates contributed to a widening of the net interest margin from 3.45% to 3.83% over the past 12 months and an 8% increase in GAAP net interest income over the same time frame. Noninterest expenses rose just 3% year over year, while noninterest income was down 1%. The rising profitability from interest rates led to M&T achieving a solid efficiency ratio of 52.4% during the quarter. After updating our projections for the bank and re-examining some of our assumptions, we are increasing our fair value estimate from $151 per share to $166, which is roughly 2.5 times tangible book value per share at the end of the quarter.

The credit environment remains benign, and even management admits that the current loss rates are far below what it would expect a long-term normalized average to be. With that being said, it is difficult to tell when exactly the current environment will get any worse. Provisioning declined during the quarter, and the net charge-off ratio also declined, along with the absolute and relative amount of loans delinquent more than 90 days. Total assets remained relatively stable quarter over quarter, and aside from the decreases in residential mortgages, commercial real estate loans grew just 2% over the last 12 months, while commercial and industrial loans declined just over 1% over the same time frame. We attribute this to M&T’s conservative lending standards and note that the bank is slowing growth while credit standards and pricing across the industry loosen--not necessarily a bad thing. Deposits were also down again, both quarter over quarter and over the last 12 months, although non-interest-bearing deposits did make a comeback during the quarter as all of the drop came from the interest-bearing side.

M&T Bank recently increased its quarterly dividend to $1.00 per share from $0.80, and management stated on its most recent earnings call that the current common equity Tier 1 ratio of 10.52% seems to it to contain excess capital, which it will look to return to shareholders over time. We project that M&T should be able to achieve a payout ratio of over 100% over the next 12 months and believe the bank has an average amount of room to expand returns on equity via capital reduction.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress-test regulations, please see our July 8 special report, "New Regulatory Proposals Will Change Stress Test Landscape."