MTB--- Nice little regional bank
October 10, 2001
M&T Bank Corporation (MTB)#
MTB: Investors appear to doubt one of the best mgmt 1M (Buy, Medium Risk)
teams -- Reiterate Buy Mkt Cap: $6,754.1 mil.
October 10, 2001 SUMMARY
* M&T reported 3Q01 cash EPS of $1.24 which represents
BANKS 12% growth vs. the prior year. GAAP EPS of $0.98 was in
Keith Horowitz, CFA line with our estimate (and consensus).
* The stock underperformed today as investors seemed to
focus on worse than expected asset quality trends which
Lovin Thomas included higher net charge-offs and 23% increase in
NPAs mainly due to the addition of one $26 mil credit.
* In a challenging economic environment, we believe
investors should stick with the very few high quality
mgmt teams such as that found at M&T; teams that have
consistently been conservative in acctg and
underwriting policies.
* We remain confident MTB can deliver 11% EPS growth
due to its focus on credit quality, pricing power and
expense mgmt. We are reiterating our Buy rating with
the stock now trading at only a very slight premium to
the group.
* Operating leverage continued to be strong with rev
growth outpacing expense growth by 300 bp, and M&T
continued to repurchase stock (2% of o/s).
FUNDAMENTALS
P/E (12/01E) 17.8x
P/E (12/02E) 13.8x
TEV/EBITDA (12/01E) NA
TEV/EBITDA (12/02E) NA
Book Value/Share (12/01E) $29.37
Price/Book Value 2.3x
Dividend/Yield (12/01E) $1.00/1.5%
Revenue (12/01E) $1,573.0 mil.
Proj. Long-Term EPS Growth 12%
ROE (12/01E) 13.1%
Long-Term Debt to Capital(a) NA
MTB is in the S&P 400(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (10/9/01) $68.50 Current Rating 1M
52-Week Range $81.23-$47.60 Prior Rating 1M
Shares Outstanding(a) 98.6 mil. Current Target Price $85.00
Convertible No Previous Target Price $85.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/00A Actual $0.86A $0.93A $0.97A $0.89A $3.65A
12/01E Current $0.90A $0.94A $0.98A $1.02E $3.85E
Previous $0.90A $0.94A $0.98A $1.02E $3.85E
12/02E Current NA NA NA NA $4.95E
Previous NA NA NA NA $4.95E
12/03E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/01E $3.83; 12/02E $4.27; 12/03E NA
Cash EPS: 12/01E $4.75; 12/02E $5.25; 12/03E NA
2002E EPS excludes goodwill amortization of $0.68 per new FASB accounting
rules
INVESTORS SEEM TO DOUBT ONE OF THE BEST MGMT TEAMS IN THE BUSINESS --
REITERATE BUY
M&T's 3Q01 EPS of $0.98 was in line with our estimate (and consensus), and
its cash EPS of $1.24 represents 12% EPS growth vs the prior year. However,
the stock underperformed (down 1% vs 2% rise for the group) today as
investors focused on higher NPAs (up 23% vs 2Q) and credit costs (0.38% in 3Q
vs 0.24% in 2Q).
Core trends were still strong by our analysis. We believe it is important to
point out that despite a large increase in credit costs, M&T was still able
to produce above average 12% cash EPS growth without the use of one-time
gains. Also, the loan loss provision exceeded net charge-offs by $4 million
(or $0.03 per share) in order to keep the loan loss reserve stable at 1.65%.
Core trends included 10% transaction deposit growth, 6% loan growth, a 4 bp
expansion in the NIM and 13% fee revenue growth. Operating leverage continued
to be strong with revenue growth (up 10%) outpacing expense growth (up 7%) by
300 bp, and M&T continued to repurchase stock (2% of outstanding shares).
Asset quality was a negative in 3Q, but should be looked at in the broader
picture. While we would agree that the 3Q asset quality news was not
positive, we believe investors need to put the incremental data in
perspective with the following: 1) M&T is very conservative in its accounting
policies -- which reduces the risk of future earnings disappointments, 2)
M&T's underwriting is among the best in the business and the increase while
large on a percentage basis is coming off extremely low levels, and 3) Core
trends were strong which enabled M&T to still meet the consensus without the
use of one time gains.
No change in our earnings estimate...The bottom line for the stock should be
whether this changes one's view on the near term earnings outlook -- we are
leaving our 2002 EPS estimate unchanged. While 2002 will present challenges
for the industry in terms of loan growth and asset quality, we believe MTB
will be able to weather the storm better than most due to above average
credit quality, a strong net interest margin related to MTB's effective
hedging and pricing power, and demonstrated ability to manage expense growth.
...And no change in our view on the stock. Currently, the stock is trading
at just 13 times our 2002 cash EPS estimate (which implies an above average
11% EPS growth) which represents only a slight P/E premium to the group. We
believe this offers a very good buying opportunity since we view M&T as one
of the highest quality and fastest growing banks in the U.S., and we continue
to believe to be among the best positioned for 2002.
WHY WE ARE NOT OVERLY CONCERNED WITH 3Q ASSET QUALITY TRENDS
On the surface, the 3Q asset quality trends appeared disappointing, and led
to the stock's underperformance today. However, we believe the issue is
determining how conservative mgmt was in its accounting policies in
developing one's view on M&T's future asset quality. We continue to strongly
believe M&T's conservative underwriting and accounting policies are likely to
lead to better than average credit quality trends in 2002, which is one of
the key reasons why we continue to recommend the stock.
Below we list what some of the key points to consider when reviewing M&T's 3Q
asset quality:
* $26 million loan added to NPA in 3Q is large, but is still less than 10% of
its legal lending limit... One of the biggest risks to asset quality is
outsized hold positions. On average, we found that regional banks' maximum
exposure to any one borrower (excluding group exposures to commercial real
estate developers) is in the range of 30-35% of the legal lending limit.
The $26 million loan added to NPA in 3Q was only 9% of M&T's legal lending
limit.
* ...And the loan is still current... M&T's accounting is considered among
the most conservative of the regional banks. The $26 million loan was to a
company that provides service and maintenance to the railroad industry that
entered a prepackaged bankruptcy in 3Q, but the loan is still current. We
would also point to a $17 million credit (to an equipment manufacturer)
that M&T added to nonperforming in 1Q, but this loan was also current as of
the September 30, 2001.
* ...And it was likely charged down to liquidation value. In prior meetings
with senior mgmt, we noted that its charge-off policy is very conservative.
M&T charges off the loans to get down to liquidation value, and this has
historically led to higher than average recoveries in subsequent quarters.
During 3Q, M&T wrote the loan down by 13%, and we would not be surprised if
this was the level for which M&T could sell it in the secondary market
(which usually carry a significant liquidity discount).
* Excluding the one big loan, there was a 7% increase in NPAs. Versus 2Q,
M&T's NPAs increased 23%. Adjusted for the single $26 million credit, we
estimate that NPAs were up 7%.
* Net charge-off ratio of 0.38% is still quite good in our opinion, and
reserves remain very strong. Net charge-offs increased from 0.24% in 2Q to
0.38% in 3Q, and the increase was fully explained by 3 commercial credits
(including the $26 mil credit added to NPA in 3Q and the $17 million credit
added to NPA in 1Q, both of which are still current). Also, M&T's reserves
are among the strongest in the industry (1.65% as a percentage of loans)
based on our loan mix analysis as well as looking at coverage to net
charge-offs. Annualizing the 3Q net charge-off ratio (even though it is
significantly higher than the average net charge-off ratio of 0.21% over
the past 10 quarters), we found that the allowance to net charge-offs was
still 4.3 which puts M&T well above the average regional bank.
* Further proof of conservative accounting, no impact from SNC exam. M&T has
a $1 billion syndicated loan portfolio. All of M&T's ratings were in line
with the regulators which provides further evidence of the very
conservative internal loan grading.
NET INTEREST REVENUE TRENDS WERE VERY POSITIVE
Versus 2Q, M&T's net interest revenue growth was a very strong 9% annualized
due several positive core trends noted below.
* 6% annualized loan growth will likely compare favorably to other banks.
<b. One of the biggest positive surprises in the results was 6% annualized loan
growth which we believe will prove to be stronger than the industry
averages. The growth was concentrated in the consumer category (up 22%)
which includes automobile and home equity. Commercial and industrial loans
were down slightly which was in line with our expectations due to the lack
of commercial loan demand. Going forward, we continue to model low single
digit loan growth.
* Slight deleveraging of the investment portfolio and large increase in
unrealized gains should not be overlooked. One aspect of the quarter that
we believe is being overlooked is that M&T ran down its securities
portfolio by 30% annualized. If M&T maintained a stable securities
portfolio, we estimate it would have added a penny to EPS. Additionally,
M&T did not take any securities gains in the quarter, and its unrealized
securities gains increased by $32 million to $42.8 million (or $0.43 per
share) as of September 30 which adds to M&T's near term earnings
flexibility.
* 10% core transaction deposit growth. Excluding CDs, M&T's deposit growth
was a strong 10%. This was in line with our expectations and is likely to
continue due to market share gains and a weak equity market environment.
* Higher NIM again. M&T keeps guiding for a lower NIM, and it continues to
positively surprise (up 4 bp in 3Q). Unfortunately, M&T does not provide
average yield data in the earnings release to better understand the
drivers. But it appears pretty clear to us that mgmt benefited again from
its ability to drive down deposit costs as well as benefit from a steeper
yield curve and lower short term rates. In the past, we have found that
M&T's net interest margin has benefited from its deposit and loan pricing
power due to its large market share in less competitive markets, and expect
this will be a continued emphasis in 2002.
AGGRESSIVE CAPITAL MANAGEMENT CONTINUED IN 3Q
M&T repurchased 2.2 million shares (2% of outstanding) in 3Q for a total cost
of roughly $165 million (average cost of roughly $75 per share) and
maintained its tangible equity/asset ratio at 5.5% (note that M&T manages to
5.4% ratio). Tangible earnings in the quarter less dividends paid was only
$100 million. However, unrealized securities gains are counted as capital
due to FAS 115, so while mgmt did not realize the $32 million of unrealized
securities gains into earnings it was able to indirectly return those gains
to shareholders during the quarter in the form of stock buyback. M&T has
300,000 shares remaining on its existing authorization, and we would expect
to see another authorization come out of next week's board meeting.
OTHER POINTS
* Fee revenue growth trends were less robust than prior quarters. Versus 2Q,
M&T's fee revenue growth was 13% annualized driven by a large jump in other
income. We believe the increase was due to higher BOLI income and gains
from sale of loans. Growth in service charges slowed as it appears the
repricing of the Keystone deposit base is now fully reflected in the run
rate (note that the ratio of deposit charges to transaction deposit ratio
remained stable at 1.28% after steadily increasing for the past several
quarters), and going forward we would expect this line to grow in line with
core transaction deposit growth of 5-8%. Part of the reason for the
slowdown in fee revenue growth appears to be related to the WTC disaster,
and thus may rebound in 4Q.
* Operating leverage improved again in 3Q. Rather than managing to an
absolute expense growth, M&T manages the spread of revenue (10%) and
expense growth (7%) which was 300 bp in 3Q and led to a 50 bp improvement
in 3Q efficiency ratio. With our expectation of revenue growth falling to
the 6-8% range in 2002, we believe management will also be able to slow
discretionary spending and keep expense growth in the 3-4% range.
* Tax rate improved which boosted 3Q. M&T's tax rate improved by 120 bp to
36.7% in 3Q which boosted EPS by $0.02 (which helped offset the higher
credit costs). Mgmt noted that the lower rate reflected tax planning
strategies and that this is a sustainable rate in the near term. Over the
past 10 quarters, M&T's tax rate has averaged 37.4%. |
