The large Buffalo, New York-based regional lender M&T Bank (MTB 0.75%) has had a chaotic last three years. When the pandemic first hit in 2020, the bank had to worry about its hotel loan portfolio based in New York City, which was one of the hardest-hit sectors in the hardest-hit regions early on in the pandemic.
Then M&T took advantage of a more active deal environment and made its largest-ever acquisition, People's United. But large bank acquisitions can be tricky and difficult to pull off, and investors aren't always so interested in staying on for the ride.
This year, despite a more difficult environment for banks with rising deposit costs and signs of credit normalization, M&T seems much better positioned, having integrated People's United and seen credit normalize more positively. The stock may be turning the corner. Here's why.
Underperformance relative to peers
Since the start of 2020, M&T Bank has been a straggler among its peers, underperforming in several key areas. While its stock is not the worst performer in the peer group, it is in the bottom half and overall down about 10% from the start of 2020.
This is disappointing because while there have been constant concerns about the economy and the future, banks had a nice setup with benign credit quality, excess deposits, rising interest rates, and hefty reserve releases in 2021 when previously expected loan losses never materialized.
M&T has also been the worst performer when it comes to its price to tangible book value. Bank stocks trade relative to their tangible book value, or net worth. M&T has seen its valuation fall from the top of the peer group to one of the lowest.
MTB Price to Tangible Book Value data by YCharts
Some of the deterioration in M&T's valuation likely has to do with the People's United deal and other factors such as unrealized losses in the bank's securities folder. But many of M&T's peers have also made transformational deals and are dealing with similar issues.
Things are looking up
Despite struggles in recent years, I definitely feel like things have stabilized at M&T and the bank is starting to shift more to the offensive, while still maintaining a conservative approach for what could be coming. Credit quality in the bank's hotel loan book is trending much better. Two or three quarters ago, M&T's CEO Darren King said that about 86% of the bank's hotel loan portfolio was criticized, meaning these loans were at elevated risk of missing loan payments. Now, criticized loans in the hotel portfolio are down below 50%.
The other good news is that M&T is starting to see some potential revenue synergies from the acquisition of People's. King said the bank expects to see loan growth from the small business relationships acquired from People's United. King also said that M&T likes People's United mortgage warehouse lending business and sees an opportunity to launch its credit card product into People's United's markets as well.
M&T has also done a nice job of holding deposit costs down through 2022, although it expects those to face more pressure this year. But M&T has plenty of cash on its balance sheet. It also expects its net interest margin (NIM), or the difference between the interest it makes on interest-earning assets such as loans and what it pays out on interest-bearing liabilities such as deposits, to stay above 4% this year.
NIM is a good indicator of profitability, and 4% is definitely solid. The outlook for the year also implies what looks to be strong operating leverage, meaning the bank expects to grow revenue faster than expenses.
Turning the corner
With credit quality now in a much better place (not that the bank won't experience normalization along with the rest of the industry) and the People's United deal closed and integrated, M&T will be less distracted moving forward.
I also do think M&T will be able to find opportunities to better penetrate People's United's commercial and small business banking clients.
And while rising deposit costs and normalizing credit quality are both a bit of a mystery, M&T looks pretty well positioned to grow profitability this year. The bank also has lots of excess capital and expects to repurchase stock aggressively.
