During the pandemic, Warren Buffett and his company Berkshire Hathaway sold their entire $800 million stake in the large regional bank M&T Bank (MTB -0.94%). In fairness, M&T wasn't the only regional bank dumped from Berkshire's portfolio, as Buffett said the conglomerate got concerned about its overall exposure to the banking sector. In recent weeks, Wall Street has emerged very bullish on M&T, with Citigroup analyst Keith Horowitz naming the bank as his top pick and Jefferies analyst Ken Usdin also naming M&T as one of the stronger beneficiaries of rising interest rates. Should you buy into the hype on this ex-Buffett stock? Let's investigate.
An interesting ride through the pandemic
When the pandemic first hit the U.S. in March 2020, M&T faced no shortage of challenges. With a material number of hotel and retail loans in areas like New York City that got hit incredibly hard at the very beginning of the pandemic, the bank faced some challenges on the credit side that took the stock longer to recover from than its peer group. Since March of 2020, M&T has still significantly underperformed the SPDR S&P Regional Banking ETF.
Net charge-offs (debt unlikely to be collected and a good indicator of loan losses) as a percentage of total loans rose at the bank during the pandemic. Additionally, nonperforming assets, those that borrowers have missed payments on, rose in 2020 and early 2021 but have since leveled off and are now heading in the right direction.
M&T Bank's Chief Financial Officer Darren King said on the company's fourth-quarter earnings call that criticized loans, those that are not yet past due but that the bank believes will be, have noticeably declined due to borrowers resuming payments and upgrades to certain loans that had previously been in trouble.
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A lot of change
At the end of 2021, M&T made projections that seemed to catch the market off guard. For one, management said it expects net interest income, the profit banks make on loans, securities, and cash, to fall in the low- to mid-single-digit percentage range from 2021, as the benefit from Paycheck Protection Program (PPP) loans and its interest rate hedging program prove to be significant headwinds. Management also said it only expects to deploy $1 billion of cash into debt securities, which seems small considering the bank had more than $44 billion of cash at the end of 2021.
However, this strategy could change, largely because management had only been penciling in three rate hikes from the Federal Reserve this year at the end of 2021, a number that could end up being seven total rate hikes this year. Bond yields have also jumped, making securities deployment much more attractive. M&T is very sensitive to rising interest rates, with a 2% move in the federal funds rate resulting in a nearly 14% increase to net interest income at the bank over the next year.
Finally, in February 2021, M&T announced its largest-ever acquisition: People's United Financial, which had more than $60 billion of assets. Like most bank acquisitions over the past year, the deal took longer to close than anticipated due to a harsher attitude in Washington toward large bank mergers, but the deal recently closed in early March.
The acquisition gives M&T a leading presence in the Eastern U.S. and will allow M&T to expand its small business and commercial banking franchise. It also looks attractive financially in that it didn't detract from M&T's net worth, it offers significant cost savings opportunities, and it's projected to boost earnings at M&T by 10% to 12% in 2023 and beyond.
Is it a buy?
The outlook seems positive for M&T Bank. Credit issues should be behind the bank now and M&T will benefit from rising interest rates. The deal with People's United is now complete and M&T can get to work on cost savings. While I am optimistic about the acquisition, large bank acquisitions can be tough to pull off, so it will be interesting to see how the combined entity performs once it's fully integrated. M&T's stock has recovered a good amount in recent months and significantly outpaced most other large bank indexes so far in 2022. Still, in trading at about 200% of its per-share tangible book value (essentially a bank's net worth), M&T carries a lower valuation than it has historically, especially in a rising-rate environment.
For all these reasons, I am going to give M&T a hold rating right now. The bank can definitely trade at a higher valuation and management has a strong track record, but I want to see how things progress with all the changes at the bank and the People's United acquisition.
