M&T Bank: Very Mixed Asset Quality Despite Loan And Deposit Growth (NYSE:MTB)

We continue our Q4 earnings coverage of regional banks today with another sizable firm in M&T Bank Corporation (NYSE:MTB). The stock from a valuation perspective is relatively attractive, and offers investors a 4% yield with a growing dividend to wait for operational performance to improve. We believe that at first, rate cuts will have a slight negative impact on net interest income, though we expect the cost of funds to fall while loan yields hold up over the longer term. As rates are cut, both sides of the margins equation will come down, though we expect the interest on deposits longer-term to outpace the declines in yields on new loans.

However, the non-interest income sources, such as fees for mortgages etc. should pick back up. In short, so long as the cuts are orderly and not a race to cut heavily, banks remain in good shape going forward. For now, it looks like margins have hit a trough in the current rate environment. Loan activity remains robust, all things considered. We think MTB stock is one to consider for longer-term investment, but with current asset quality and efficiency metrics, rate it a hold, despite deposit and loan growth. Let us discuss.

Earnings hit by loan loss provisions

In the just-reported Q4, the bank saw an increase in the deposit and loan base. Revenues fell year-over-year in Q4, with M&T Bank bringing in $2.31 billion. These revenues were an 8% decrease year-over-year, pretty much in line with what was expected. Loan loss provisions have been a concern in this economic environment. The provision for credit losses was up to $225 million this quarter, thanks to continued pressure on investor-owned commercial real estate borrowers and a $1.7 billion increase in loan balances overall in the quarter.

M&T Bank saw net income of $482 million, or $2.74 per share. On an adjusted basis, EPS was $2.81. This was below consensus expectations by $0.86, driven largely by higher provisions for credit losses and some higher expenses. However, growth in loans and deposits was a positive.

Movement in deposits and loans

As you know, having more deposits helps liquidity for future investments. It is a key indicator to monitor. That said, total deposits were $164.7 billion at the recent quarter-end, up from $163.5 billion a year earlier and $162.7 billion to start Q4. Over on the loan front, much like deposits, we saw increases. Total loans were $132.7 billion compared with $132.6 billion in Q3, and up from $129.4 billion to start the year. Net interest margin is down significantly from 4.06% last year, but also dipped from 3.79% in Q3, coming in at 3.61%. While margins have largely hit a bottom in this rate environment for the sector, MTB is still seeing pressure here.

Asset quality mixed

Loans are up, but we need to have a sense of asset quality. We saw provisions were up, which is a negative. Well, in Q4 net loan charge-offs ballooned to 148 million, rising from $96 million in the linked quarter and up from $54 million last year. Thus, net charge-offs were 0.44% in the quarter, up from 0.12% last year.

Nonaccrual loans dipped, however. They totaled $2.16 billion at the end of Q4, down from $2.34 billion in Q3. Nonaccrual loans were 1.62% of total loans, compared with 1.77% in Q3 and 1.85% a year earlier. This was a positive. The allowance for credit losses ticked up to $2.13 billion or 1.59% of loans, compared with $2.05 billion or 1.55% in Q3, and 1.46% of loans a year ago. Overall, the quality was mixed.

Efficiency ratio suffers

M&T Bank is still a pretty highly efficient bank, but this was a tough quarter for efficiency with the big earnings miss. We still like to target a textbook 50% efficiency ratio, but the efficiency ratio worsened to 62.1% compared to 53.7% in the sequential quarter, and also worsened from 53.3% a year ago.

The return on average assets and equity fell markedly. The return on average assets declined to 0.92% vs. 1.40% in the year ago quarter. The return on average equity is also trending lower, down to 7.41% vs 12.59% last year.

Final thoughts

We do like the M&T Bank Corporation dividend here, and think metrics are approaching a base in this rate environment, but the current asset quality metrics give us pause. This comes despite growing loans and deposits. Margins are still under pressure and efficiency has suffered. As we look ahead to a rate-cutting environment, we expect stronger loan origination and a lower cost of funds. For now M&T Bank Corporation is a hold and wait for management to execute, in our opinion.