Two Worrisome Numbers From This Bank
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Living in Maryland, everyone knows M&T Bank (NYSE: MTB) if for no other reason than they are the official bank of the Baltimore Ravens. However, one reason I've kept track of M&T is the company was one of the few banks to maintain a good dividend throughout the financial crisis of the last few years. With the bank recently reporting earnings, I hate to say it but M&T is sort of stuck between a rock and a hard place. The company has decent name brand recognition, but their competitors seem to be doing a better job specifically in the area of growing deposits and loans. Since many of their competitors have also restored respectable dividends, investors need to decide if M&T should be their official bank or if they should look elsewhere.
Having worked in the banking industry, I can tell you that the lifeblood of any bank is deposit and loan growth. Since there have been multiple changes to the fees banks can charge on deposit accounts, companies are having to get more creative with where they find growth. M&T apparently decided that their growth could come in the form of their acquisition of Wilmington Trust. This combination gives M&T a much larger presence in trust services, which is less affected by interest rates and legislative changes. In fact, this acquisition led to an increase of 62% in trust income on a year-over-year basis. While this is a positive for the company, M&T needs to do a better job growing their deposits and loans or risk being left behind by faster growing competitors.
Where deposits are concerned, BB&T (NYSE: BBT) led the way in recent earnings reports showing 17.7% deposit growth. While not as impressive, Wells Fargo (NYSE: WFC) still managed 8% growth, while PNC Financial (NYSE: PNC) reported relatively flat numbers if you exclude the RBC acquisition. By comparison, at M&T total deposits were up just 6%, meaning on a relative basis both BB&T and Wells Fargo stole deposit dollars that were available for the taking. In addition, M&T was one of the few banks to show interest-bearing deposits decreasing with a 2% decline. The challenge this presents to the bank going forward, is many times non-interest-bearing deposits are single service households that can be potentially cross-sold into checking accounts down the line. However, with runoff in this category, it will be more challenging for the bank to generate checking account growth in the future. When it comes to loan growth, M&T is attempting to grow its portfolio in areas the bank traditionally has avoided. However, the company is so heavily invested in commercial real estate, that even big changes to the portfolio don't move the needle very much.
One of the more challenging aspects of lending has been commercial loans. This was partially due to the uncertainty in the economy, and partially because commercial clients avoided taking on new debt due to this same uncertainty. While M&T did show decent growth in the commercial area, the company's portfolio is largely tilted toward commercial real estate lending. While competitors saw this line item decrease, M&T reported commercial real estate loans up 3%. While on the surface this sounds like good news, the problem is the company's portfolio is so heavily tilted to this type of loan that even a 41% increase in consumer real estate loans didn't change the overall number very much. In fact, while commercial and finance loans were up 9%, overall consumer loans were down 4%. As you can see, M&T turned in a decent quarter, but as I mentioned before there are two numbers that investors need to keep a close eye on.
The first issue I noticed is connected to the company's credit quality. While the company's non-accruing loans decreased 13% on a year-over-year basis, 90 day past due loans actually increased 15%. Since 90 day past dues have a good chance of turning into charged-off loans, this is a serious concern. The strange part is, the company is the only one of its competitors that does not have enough set aside to cover current past-due loans. Where BB&T, PNC, and Wells Fargo are concerned, each bank has set aside about 120% as their coverage ratio for past due debts, M&T shows a current coverage ratio of less than 100%. What this means is, if the company's current non-accruing loans all were to charge off the bank has not set aside enough money to cover everything. This could lead to higher coverage allocations in the future which would directly harm earnings results. The second issue I noticed has to do with the company's relative deficiency when it comes to their interest margin.
M&T shows the lowest net interest margin of the four banks we've looked at. The company's net interest margin in the last quarter was 3.74%, which is significantly less than the 3.91% that Wells Fargo, 3.95% at BB&T, and over 4% at PNC. The disconcerting part about this number is, M&T was one of the few to report a decline in interest-bearing deposits. Normally a decline in interest-bearing deposits means CD runoff. In theory, this should raise the company's net interest margin. While this number did improve from last year, in the meantime it simply means that M&T will make less money than their competition on the same deposit and loan balances. As you can see, these two challenges will directly affect the company's ability to compete effectively in the future.
In summary, while M&T turned in a decent earnings report, their lower coverage ratio and rising 90 day delinquencies are worrisome. When you combine that factor with a lower net interest margin, even the company's respectable dividend is not enough for me to suggest M&T over their competition. BB&T had the best combination of earnings, deposit, and loan growth, with Wells Fargo and PNC coming in tied for second place. This leaves M&T in the difficult position of playing catch-up against institutions that are already operating at a more efficient level. Investors should be aware of these disadvantages. Until the company solves these two major issues, I would recommend avoiding the shares.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of PNC Financial Services and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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.