M&T Bank Stock Hasn’t Seen The Price Growth It Deserves (NYSE:MTB)

M&T Bank (NYSE:MTB) is a Buffalo, New York-based regional bank, with over 1000 branches across the Eastern US, ranging from Maine to North Virginia. The bank operates as a universal bank, offering retail banking, commercial banking, and investment banking services.

Through these activities, M&T recorded Q3’23 revenues of $3.09bn, alongside a net income of $688.70mn, and a free cash flow of $1.11bn- a 52.71% YoY increase driven by increased operational cash flow.

Introduction

A key aspect of M&T’s value proposition remains its highly inelastic retail consumer base, which supports and reduces retention costs for M&T and promotes organic growth as consumer families and wealth grow. The firm primarily does this through an extensive focus on customer engagement, ensuring multilingual and multicultural relationships with clients, engaging with community projects, supporting businesses, and overall earning top rankings for small business and retail banking.

This customer-focused strategy, combined with a moderate undervaluation and the firm’s prudent risk management, leads me to rate M&T Bank a ‘buy’.

Valuation & Financials

Trailing Year Performance

In the TTM period, M&T’s stock-down 5.77%- has experienced middling performance between the regional banking industry, as represented by the SPDR S&P Regional Banking ETF (KRE)- down 11.08%- and the broader market, as represented by the S&P 500 (SPY)- up 23.96%.

While M&T and the wider regional banking sector’s underperformance to the market can be explained through the bank failures from earlier this year, I believe M&T’s superior price action to regional banks demonstrates the firm’s overall quality and commitment to risk mitigation, thus lower beta.

Comparable Companies

Regional banks are generally homogenous across basic operations, with the only differentiators being the actual region, the composition of the target demographic, and the bank’s risk appetite. As such, I chose to compare M&T to the other banks listed under Seeking Alpha’s ‘Peers’ tab for M&T Bank. This group includes the Midwest-centric, Columbus, Ohio-based Huntington Bancshares (HBAN), the South-focused, Birmingham, Alabama-based Regions Financial Corporation (RF), the New England and East Coast-focused, Providence, Rhode Island-based Citizens Financial Group (CFG), and the Chinese-American community-centric, Pasadena, California-based East West Bancorp (EWBC).

As demonstrated above, M&T has experienced the second-best performance over the past year in the peer group. Despite this outperformance, I believe M&T’s operational model lends them greater growth. Exemplifying this room to grow is M&T’s superior multiples-based value in addition to greater underlying fiscal strength.

For instance, M&T maintains the lowest trailing and second-lowest forward P/E ratio of the group, in addition to the second-lowest PEG ratio. In terms of growth, M&T does not stand out from the field, but is no slouch either.

The firm also maintains a superior balance sheet position to peers, with the joint-second-lowest debt/equity ratio and the highest book value per share by far.

M&T also pays out a respectable 3.76% dividend, with a prudent payout ratio of 27.57%.

Valuation

According to my discounted cash flow valuation, at its base case, the net present value of M&T is $153.38, meaning, that at its current price of $137.32, the stock is undervalued by ~10%.

My model, calculated over 5 years without perpetual growth built-in, assumes a discount rate of 8%, reflecting M&T Bank’s low implied volatility and debt-light cap structure. Additionally, to be conservative, I estimated a forward 5Y revenue growth rate of 6%, despite M&T’s trailing 5Y arithmetic average of 16.95%, reflecting the lower potential for revenue growth given tighter monetary and macroprudential environments.

Alpha Spread’s multiples-focused relative valuation tool more than corroborates my positive view on the stock, estimating a 23% undervaluation, with a relative value of $178.52.

Therefore, averaging my NPV and Alpha Spread’s relative value, the fair value of M&T Bank is $165.95, a ~16.5% undervaluation.

M&T’s Customer Focus & Fiscal Prudence Drive Value Proposition

As aforementioned, at the core of M&T’s underlying strategy remains consumer relationships and retention. This focus on individual relationships comes hand-in-hand with a smaller per-person deposit base, reducing third-party risk, especially with a majority of deposits insured/collateralized. Additionally, this granularity supports a more diverse deposit base, reducing implicit risk. Moreover, M&T can cultivate lower-value relationships into higher-value ones as clients mature. Above all, however, a key value driver of M&T remains its liquidity profile, enhanced by stable but granular deposits.

M&T also demonstrates outsized geographic coverage with well-optimized real estate expense management. The firm prioritizes high-density locations, with the third most branches of any Northeastern bank- the highest of any non-mega-cap bank.

Keeping with M&T’s conservative growth theme, the firm has focused extensively on reducing its sensitivity to interest rate volatility, from ~2% effects in both increased and reduced interest rate positions to averaging less than half that number. Although I highlight interest rate movement as one of the key risks to M&T, the firm is addressing this proactively.

Wall Street Consensus

Analysts generally echo my positive view of M&T, estimating an average 1Y price target of $149.17, an 8.82% increase.

At the minimum projected price target, however, analysts expect a decline of 11.73% to $121.00- not all that negative considering the trailing-year movements of some regional banks.

Risks & Challenges

Interest Rate Volatility May Compress Margins, Scale

Although, as discussed when covering the firm’s interest risk management, M&T has been reducing its sensitivity associated with interest rate movements, the still expects to see -$193mn in net interest income if rates fall by 1%, which looks increasingly likely by Spring 2024 in my opinion. Even if rates stay the same or rise, the firm will face reduced longer-run demand for credit products.

Increased Regulatory Pressures May Inhibit Growth

While M&T remains more insulated from the pressures other regional banks face due to its conservative nature, M&T is still privy to potential regulations or rules governments may impose upon smaller banks to reduce economic risks. Said regulations may further inhibit scale growth and the ability of banks such as M&T to operate with flexibility and greater efficacy.

Conclusion

Looking forward, M&T is a conservative bank whose undervaluation, customer focus and risk management support gradual price appreciation alongside solid income.