M&T Financial institution Inventory: A Profitable Regional Financial institution (NYSE:MTB)

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The financial sector has been hammered the last few months, along with the broader market. This comes as somewhat of a surprise. Rates are on the rise as we all know, and that is good for banks. However, during this transitional few months during the hike cycle, there has been a lot of concerns about the rate spreads between what the bank pays on deposits vs. lends out. As rates have begun to ramp, there has been a bit of some demand shock due to the much higher rates for home, auto, and personal loans. Now, you couple this with ongoing concerns over a stretched consumer, and small businesses being under pressure from rising labor costs, supply costs, and, the biggest elephant in the room, inflation.

All of this has combined to hammer the stocks of banks. But we think this is creating an opportunity. That is what we do. We find beaten down stocks and sectors and profit heavily from the rebound. We believe that as the next few quarters roll on, these higher rates are going to be a big windfall for the banks. We think you can start to buy some of these beaten-down names. Specifically, there are opportunities in the regional banks. M&T Bank Corporation (NYSE: MTB) stock is one that we like at these levels and below.

Why we like M&T Bank generally

We think MTB is a good buy at these levels. We want to own quality regional banks as interest rates are rising, and profit from the big increase in net interest income that will be realized as time moves on. As rates rise, the bank will have more earnings power potential, as this temporary slowdown in originations as a whole will not last. Essentially, the spread on money it lends its customers relative to what it pays out on interest on deposits will widen, feeding the bottom line ultimately. While there have been concerns on the economic front that have hurt short term lending, we believe the regional banks will be winners.

We like this bank and its operations and are happy with recent decisions for growth. A recent acquisition of People’s United helped grew the bank. With this pull back, we think that you want to own shares that now yield over 3.20% and wait for the turnaround. In this article, we discuss recently reported performance and why we like the bank ahead of Q2 earnings this week.

Recent performance strong but down from last year

In the recently reported first quarter, the bank saw a slight reduction in the deposit and loan base. Still, the earnings power of the bank is impressive. Revenues jumped into Q1, with M&T Bank bringing in $1.45 billion. These revenues of $1.45 billion were a 2.2% decrease year-over-year. One issue that had impacted many regional banks had been high loan loss provisions last year with the COVID crisis. The provision for credit losses was $10 million in the recent quarter, compared with credits of $25 million and $15 million recorded in the first and fourth quarters of 2021, respectively.

M&T Bank saw its net income narrow to $362 million or $2.73 per share on an adjusted basis compared to $447 million or $3.33 per share in the same quarter of 2021. This was well above consensus expectations, beating them by $0.12. It was a strong quarter, even with some rate shock impacting demand somewhat for loans. There was also a big decline compared to last year as PPP loans are paid off.

Movement in deposits and loans

Having more deposits helps fund more loans. This is especially true long term when the spread eventually widens on what the bank pays interest on for deposits compared to what it collects on loan fees and interests. As rates increase, they can make better-termed loans as well. That said, total deposits were $126.3 billion at the recent quarter-end, $128.5 billion a year earlier and $131.5 billion at December 31, 2021.

Over on the loan front, much like deposits, the acquisition of Peoples United will help. Loans were $91.8 billion at March 31, 2022, compared with $99.3 billion a year ago, and $92.9 billion at the start of 2022. The lower level of loans reflects declines in balances of PPP loans outstanding. PPP loans totaled $592 million at March 31, 2022, down from $6.2 billion at March 31, 2021, so this really is the bulk of the lower loan amounts.

asset quality

Although loans have declined a bit, we like to have a sense of asset quality. In short, we need to ensure the bank is not sitting on assets that are simply not performing. Well in Q1 net loan charge-offs were $7 million much improved from $75 million Q1 2021 and $31 million in Q4 2021’s. Thus, net charge-offs were 0.03% and 0.31% in the first quarters of 2022 and 2021.

Nonaccrual loans totaled $2.13 billion at the end of Q1, up from $1.96 billion a year ago, and $2.06 billion at the end of Q4. So as a percentage, nonaccrual loans were 2.32% of total loans compared with 1.97% a year earlier. The allowance for credit losses however, was much reduced. They totaled $1.47 billion or 1.60% of loans outstanding at the end of Q1, compared with $1.64 billion or 1.65% a year ago, and $1.47 billion or 1.58% in Q4.

As we look ahead to the Q2 report, we are looking for credit quality metrics to remain strong, but a higher provision for credit losses is possible.

Efficiency is key

M&T Bank is still a pretty highly efficient bank. When we look at banks at the regional level, we like to target a textbook 50% efficiency ratio as being very strong, or highly efficient. Well, the efficiency ratio was 64.9% compared to 60.3% in the sequential quarter, excluding one-time items. This is still a very strong result, despite the slight dip.

Further, both the return on average assets and equity fell markedly. The return on average assets declined to 0.97% vs. 1.22% in the year ago quarter. This is a sizable decline. The return on average equity is also trending lower and we see it starting to stabilize in Q2 2022 and beyond. But in Q1 it came in at 8.55%% vs 11.56% in Q1 2021.

As we look at the Q2 report, we are looking for efficiency to stabilize, and to start to improve with the net interest rate spread later this year.

Valuation is still attractive

You should consider buying bank stocks when they are near (or even below) book value. The bank’s stock is $156, falling in recent months, but starting to rebound. That said, these share prices are now above book value. Book value per share was $124.92, up from $118.12 a year ago. This is very positive. The premium is not too expensive here. Tangible book was $89.33, rising from $82.35 last year. We think shares would be much more attractive at $130, but we believe you can start buying as the banking sector looks to the bottom out this year. Based on these valuation metrics they are still attractive given the improved outlook for the future.

A strong dividend

The bank also pays a dividend and the stock is currently yielding 3.0%. The dividend paid is $1.20 quarterly and is in no danger of being cut based on the payout ratio metrics.

CEO commentary

The bank is in fine shape, despite the recent contraction. Darren J. King, Chief Financial Officer, commented:

“The first quarter results continue to reflect M&T’s strong credit underwriting as evidenced by historically low charge-offs for the quarter and a stable allowance for credit losses. Revenues were in line with expectations and expenses, which include the usual seasonal increase in salaries and employee benefits expense, were prudently managed.Our capital position remains very strong with an estimated Common Equity Tier 1 ratio of 11.6%, compared with 11.4% at last year’s end.We were excited to close the People’s United merger and look forward to working together with our new colleagues to expand our premier banking franchise.”

The capital structure is definitely sound here. While it is a period of contraction with what is happening, this is a quality regional bank to consider ahead of earnings.

final thoughts

Rates rising will immediately fuel the bottom line as the bank will make more money on every loan it issues now. In the short term there are some rate shock issues pressing borrowers, but this is a short term headwind. Further, there is growth through more acquisitions. The dividend is solid and relatively decent yield. Asset quality is improving, and we expect shares to rally as interest rates rise into 2023. Start buying on the weakness.

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