Is Small the New Big?
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
M&T Bank Corp (NYSE: MTB) is a Thrift bank which belongs to the underappreciated Regional banking sector, sometimes tarred by the same brush which took down its larger brethren. M&T stock has been particularly low key, running between $65 and $87 since early 2010. But last week saw this change with a powerful move past $87 on huge volume after its announced its acquisition of Hudson City Bancshares (NASDAQ: HCBK). Since the break it has comfortably traded close to 2 million shares a day, well above its typical 200K day. Investors have taken on board the acquisition which was also well received by Hudson City Bancshares which saw its price jump over 15% on the news.
However, Hudson City Bancshares was in trouble long before M&T Bank snapped it up. The company had seen a diminishing Return on Assets and lost the ability to declare a dividend, one of the stock's core attractions for investors (but ultimately proved unsustainable). For M&T it has gained a major player in New York, acquiring $25 billion in deposits and $28 billion in loans and a 135 branch network. But M&T has been quietly acquiring. In 2011 it took onboard Wilmington Trust, adding the $10.4 billion of Wilmington assets to the (then) $68.3 billion assets of M&T. The Hudson City deal adds another $44 billion of assets to M&T's balance sheet, emphasising the size of the deal at a knock down price of 85% of tangible book value which by some is considered a steal.
The deal was enough to have Moody's place M&T on watch for a possible downgrade as the acquisition increased M&T's exposure to residential mortgages, although Fitch and S&P were more positive on the move. In addition, Hudson's issues were not to do with its strong residential mortgage book, but derived from interest rates and penalties from funds borrowed from the Federal Home Loan Bank of which $13 billion remains to be paid back.
The deal puts the number game up into the air. The P/E ratio of 15.7 is just above the sector average of 13.9, but behind competitor's KeyCorp (NYSE: KEY) 9.6 and PNC Financial Services Group (NYSE: PNC) 12.9. The acquisition will add $0.8 billion in revenue to MTB's current $3.7 billion. This will likely take a few quarters to work its way as profit once acquisition costs are factored in. M&T Banks' rivals pay less of their earnings out to investors: KeyCorp and PNC Financial Services Group have dividend yields of 2.4-2.6% compared to M&T's 3.2%. Will the additional revenue generate an increase in the dividend? The bank last raised its quarterly dividend in August 2007 from $0.60 to $0.70 share. However, it was able to maintain the rate during the plunge of 2008/09 when the stock went from the $120s down to the low $30s. So even if the stock remains capped by supply at $87 it can still entice investors to buy by offering a dividend increase.
Business prospects remain good for the sector. Tightening lending standards from foreign banks have enabled Regional banks to fill the gap. Regional banks have also benefited from the move away from the larger national banks following the credit crisis and more aggressive fee baiting by the majors. Investors looking for some stable financials to add to their portfolios would do well to take a look at Regional banks.
fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of KeyCorp and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.If you have questions about this post or the Fool’s blog network, click here for information.