M&T Bank Still Progressing, Still No Bargain

By Stephen D. Simpson, CFA | April 16, 2012 AAA

Banks are looking less distressed these days, but nobody really knows what the new normal is going to look like. Regulatory changes may lower long-term return on equity relative to past levels, but banks have a knack for finding new sources of revenue. The question for M&T Bank (NYSE:MTB), then, is how successful the company is in building on its large Wilmington Trust acquisition and whether it can exceed historical returns.

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A Solid First Quarter
In many respects, M&T Bank's first quarter is a lot like the fourth quarter. Net interest margin was a little better than expected, non-interest income was a little better and expenses were a little higher.

All in all, reported operating revenue rose 17% from last year (helped by the acquisition), while it rose about 2% sequentially. Loan growth was OK, with period-end balances up a little more than 1% sequentially. The mortgage business continues to recover (including a 17% fee income growth), and M&T also made more commercial real estate loans.

Where M&T really stood out was with its lower levels of provisioning. Non-performing asset and net charge-off ratios both declined, and credit seems to be improving.

SEE: Analyzing An Acquisition Announcement

Is TARP Really an Issue?
Reading commentary on M&T Bank, it appears as though at least some investors, analysts and commentators are bothered that M&T Bank has not yet moved to repay its Troubled Asset Relief Program (TARP) funds. While M&T Bank took only minimal TARP funds for itself, additional obligations were brought in with acquisitions. All told, the company has a little under $400 million in funds outstanding.

While TARP balances do impose some restrictions, they're not especially onerous and the cost of these funds (a 5% dividend on preferred shares through 2013) isn't really that bad. Consequently, I don't see why M&T would be in any great hurry here.

Solid Shares and a Good Deposit Base
A big part of the attraction of M&T Bank, apart from its well-regarded management, is the strong share it has in markets like upstate New York and Maryland. In particular, M&T Bank holds good share in affluent deposit bases. While rivals like First Niagara (Nasdaq:FNFG), KeyCorp (NYSE:KEY), PNC (NYSE:PNC) and Capital One (NYSE:COF) would love to have those deposits, these mass-market deposit-gatherers aren't really set up for that market.

That said, mid-Atlantic markets like Maryland are getting increasingly competitive and M&T Bank is likely going to face tougher competition. While the trust and asset management business of Wilmington Trust will offset some of that, there also looks to be increasing competition in the high-margin trust and wealth management businesses as banks look to offset regulation-imposed pressures on fee income.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
I like M&T Bank, but this has generally been a well-regarded bank for some time and seldom offers a major discount. Even if M&T Bank can produce long-term returns on equity of 12% (above its long-term average), the stock is only modestly undervalued. Should this stock go on sale, I'd be interested in buying, but with other cheaper banks out there today, I wouldn't chase these shares.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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