Over the past 35 years, M&T Bank (NYSE:MTB) has returned over 23,500% in the market. It's a core holding of Warren Buffett's financial stock portfolio, largely because it's so well managed. M&T is a fantastic bank by almost any measure.
But that doesn't mean the bank doesn't face risks. As the market looks forward to 2015 and beyond, here are two of the biggest risks facing this institution.
Let's start with industry challenges
The banking industry has been forced to undergo massive changes since the financial crisis, and that's a good thing.
Banks today are required to hold more capital on the books than ever before. The Dodd-Frank Act, Durbin Act, and other new regulations limit some major profit-center businesses like proprietary trading, interchange fees, and investments in private equity and hedge funds, to name a few. New consumer protection regulations require banks to go to unprecedented lengths to ensure that borrowers understand exactly what their loan agreement requires.
Banks with more than $50 billion in total assets are required to perform periodic stress tests both internally and externally with the Federal Reserve. Large banks are required now to maintain so-called "living wills" that lay out a blueprint of the organization to assist the FDIC in winding down the bank if it were to fail.
In 2015, the changes will continue coming. New regulations will begin to phase in requirements for increased liquidity on the banks' balance sheets. This extra liquidity should help to prevent a freezing of short-term capital markets like we witnessed during the crisis. For banks, it means further realignment of the balance sheet and higher holdings of safe but low-yielding assets -- think cash and Treasuries instead of mortgage-backed securities.
These changes are, in general, positive for the financial system. The problem for banks is that these regulations are massive, complex, and expensive to implement and manage.
For M&T Bank, these changes are a real risk to long-term profitability, albeit less so than they are for more complex banks -- M&T Bank's simple model is one of the many reasons I think it's a strong investment candidate. In 2013, M&T hired 69 new employees just to manage the banks' stress-testing and living-will processes. Over half of those hires have a master's degree or Ph.D. The bank also invested millions to update systems and backroom processes to make compliance possible.
Since 2012, the bank has invested hundreds of millions to revamp and improve its Bank Secrecy Act and anti-money laundering compliance. Regulators are so serious about these reforms that they are blocking the bank's pending merger with Hudson City Bancorp (UNKNOWN:HCBK.DL) until M&T Bank proves it is satisfactorily compliant.
These expenses are investments in non-revenue-generating areas of the bank. They won't increase profitability or drive new revenue. Further, these expenses will recur in 2015 and beyond, so they will put downward pressure on the bank's historically impressive efficiency and profitability.
The single biggest risk for M&T Bank's long-term shareholders
Since the early 1980s, M&T has been one of the best-managed banks in the country. From efficiency to profitability to capital allocation, it's difficult to find a better example of bank management.
That success is largely thanks to one man. He is the bank's largest individual shareholder and its chief executive officer: Robert Wilmers.
In my opinion, the single largest risk to this bank's future is what happens when Wilmers no longer heads the bank. Wilmers turns 80 in 2015, and while he seems as spry as ever (his annual letters to shareholders are a must-read for bank investors), there is a limit to how long he can effectively lead the bank. How long that might be is anyone's guess.
History is full of precedents for companies that run aground after their long-term leader steps down. General Electric hasn't seen significant stock appreciation since Jack Welch retired. Apple's greatest product innovation since Steve Jobs' passing is arguably a digital watch strikingly similar to a product that Samsung brought to market over a year earlier.
In the 1970s and 1980s, Wachovia was considered one of the best-run banks in the country. When its legendary leader John Medlin fully stepped away from the company in the mid-1990s, the company was quickly gutted in a merger with First Union (the Wachovia name survived, but the legacy culture was effectively replaced). It took First Union a short 10 years to run Wachovia straight into the ground before it was eventually bailed out by Wells Fargo during the financial crisis.
Will this happen to M&T Bank when Wilmers steps aside? I have no idea. But for any long-term investor, this concern should be at the front of your mind. Sometimes a company's leader has shoes that are simply to big to be filled.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Apple, Bank of America, and Wells Fargo and owns shares of Apple, Bank of America, General Electric, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.