Here's A Regional Bank That's Worth A Look

Matthew 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 (NYSE: MTB) is a relatively large regional bank, with most of its operations concentrated in the Northeastern U.S. M&T has an excellent history of profitability, and didn’t even have one quarter in the red during the entire financial crisis, a claim even some of the “rock-solid” big banks can’t make. The company also is extremely well capitalized and has grown tremendously over the years, primarily due to its ambitious acquisition record. With its biggest acquisition yet announced last year, is now a good time to get in on this one, or would we be better off with one of M&T’s big brothers?

About M&T

M&T operates a total of 707 branches, with the majority in New York, New Jersey, Maryland, and Pennsylvania. The company also has a small, but significant presence in five other states and in Washington, D.C. M&T is and has been one of the most financially sound banks in the market, and as a result, the financial turmoil that spread across the sector in recent years didn’t affect the company nearly as much as its competitors. M&T has much lower loan default rates than its peers, and the fact that the bank remained profitable throughout the entire crisis speaks volumes about its strength. The chart below shows how M&T’s earnings history compares with other banks.

<img alt="" src="http://g.fool.com/editorial/images/54561/mtb-earnings_large.png" />

Over the years, M&T has done a tremendous amount of acquisitions in order to increase their footprint. Recent major acquisitions include Provident Bankshares for $270 million in 2009 and Wilmington Trust Corp for $406 million in 2011. Last year, M&T announced their largest deal to date, agreeing to acquire Hudson City Bancorp (NASDAQ: HCBK) for about $4.4 billion.

The pending acquisition and what it means

Hudson City is a regional bank with 135 branch locations, mostly in New Jersey. The company has about $25 billion in deposits and $28 billion in loan receivables, and will effectively double M&T’s banking presence in New Jersey, where it currently has 98 branches and just under $20 billion in deposits.

What does this deal mean for M&T? Well, first of all, as shares of M&T rise, this deal gets more and more expensive since each Hudson City shareholder is receiving a predetermined amount of M&T stock. Once the deal finally closes, the company will instantly become one of the big players in New Jersey banking, and the end result should be a market share of over 15% in the state (they have 7.1% currently). Additionally, I anticipate at least some consolidation of the New Jersey branches which will result in significant cost saving once the acquisition is fully integrated.

The numbers

I believe that M&T trades at a significant discount relative to its potential. Shares currently trade for just 12.8 times TTM earnings and pay a 2.7% dividend yield. M&T is expecting earnings of about $8.20 per share this year, and the consensus calls for this to rise to $8.85 and $9.48 in 2014 and 2015, respectively. This means that M&T is forecast to grow its earnings at an average forward rate of about 8% annually, which certainly justifies the P/E multiple, especially considering the bank’s track record of stability and profitability.

Alternative 1: PNC, a larger regional bank

PNC Financial Services Group (NYSE: PNC) is a much larger regional banking option with over 2,900 branches and is roughly three times the size of M&T by market cap. PNC has operations in 19 states, with the largest in Pennsylvania (where it has a number one market share) and Ohio. PNC trades at a very similar valuation to M&T, with shares at 12.7 times TTM earnings and similar growth projected in the years ahead. I prefer PNC out of the two because of its slightly more ambitious growth strategy, but these two are very close.

Alternative 2: Wells Fargo, former regional bank

Another way to go would be to invest in a national giant like Wells Fargo (NYSE: WFC) which is actually the fourth largest bank in the U.S. Over the years Wells has greatly increased its footprint, helped by several acquisitions, the most significant of which was the purchase of Wachovia in 2008. Wells Fargo appears to be the “cheapest” of the three banks discussed at just 11.6 times last year’s earnings, but this is common for a company as large as this. Generally, when investing in one of the industry leaders like Wells Fargo, investors are willing to give up some of the growth potential that would be associated with a smaller company in exchange for increased strength and stability. That seems to be the case here, but considering how fiscally sound the other two are, I’d rather invest in one of those, although Wells is my favorite of the big banks.

Summary

I think that the banking sector is generally cheap still, and the three companies listed here are some of my favorite ways to play it. I like M&T because of its historically stable and consistent performance, as well as for its ambitious growth plans. Now may be a great time to get in before the Hudson City deal closes, as I think it will add tremendous value for M&T’s shareholders.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of PNC Financial Services and Wells Fargo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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