Morningstar | We Are Lowering M&T's FVE to $162 from $166, But Still See A Strong Underlying Business. See Updated Analyst Note from 17 Oct 2018
After incorporating recent results into our model, we are lowering our fair value estimate for narrow-moat M&T Bank to $162 per share from $166, which is 11.7 times our 2019 earnings per diluted share. M&T posted a strong bottom line; earnings per diluted share grew 8% from the previous quarter to $3.53 and M&T is well on track to meet our annual expected diluted EPS of $12.58. Our short-term outlook is that the rising interest rate environment will allow M&T bank to reprice loans upward much faster than they reprice deposits. Although, over the medium to long term, we think that depositors will be able to bargain for higher rates, we expect that M&T is likely to have deposit cost advantages relative to other banks. The rising rate environment allowed M&T to grow net revenue 6.3% year to date, which was largely driven by M&T expanding its net interest margin to grow net interest income. We think that M&T’s ability to control deposit costs will allow them to continue growing its net interest margin to just under 4% over the next five years.The limiting factor for M&T’s top line growth is deposit shrinkage driving loans down by about 1.4% year over year. M&T acquired a portfolio of relatively high-priced time deposits when they purchased Hudson City Bancorp, and subsequently let this portfolio run down over the past few quarters. The loan-to-deposit ratio is marginally down to 97.5%, and the lack of excess deposit funding continues to materially limit loan growth. That said, we think that management is doing the right thing by letting these higher cost time deposits leave because it should allow M&T to expand the net interest margin further.  We expect that M&T will have a year of flat loans in 2019 and then move upwards toward a more normalized level in successive years.
M&T is demonstrating that it is committed to sending the incremental top line growth to the bottom line. M&T bank received positive press when it announced it would raise their minimum wage, and we were impressed to see that they cut other expenses enough to drive the proportion of revenue eaten by noninterest expenses to 51.41%, much lower than the linked quarter in 2017. We feel confident that M&T will be able to control expenses in the rising interest rate environment and expect the efficiency ratio to go below 52% on an annualized basis in the coming five years.
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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