2 Problems That Could Derail This Huge Growth

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Just like the team they represent, M&T Bank (NYSE: MTB) is off to a great start in 2013. As the official bank of the Baltimore Ravens, both the team and the bank have a lot to squawk about. The Ravens of course won the Super Bowl, and M&T should win some sort of trophy for their recent results. However, even though the bank's earnings were generally impressive, there are two issues that investors need to keep an eye on.

This Is A Tough Place To Play
To find M&T's competition, you only have to look in local neighborhoods around Maryland. As the bank of the Ravens, this helps potential customers identify M&T among their competitors, but in this area competition is tough. Super-regional banks like BB&T (NYSE: BBT), PNC Bancorp (NYSE: PNC), and SunTrust (NYSE: STI) all have locations in M&T's backyard. Aside from SunTrust, which has been going through some troubles, BB&T and PNC have both been strong banks looking to take deposit and loan market share. 

Investors looking for strength in the banking system should look to the Eastern U.S. as proof that multiple banks can show good growth at the same time. While their larger rivals fight to take business from each other, and make complicated deals underwriting debt, making derivative trades, and generally confusing investors, these super-regional banks stick to what they do best, they gather deposits and make loans.

In the current quarter, M&T grew deposits by 10%. While these results compare favorably to SunTrust's growth of 2%, or BB&T's growth of 8.1%, they fell just short of PNC's growth of 11%. When it comes to lending, M&T increased their loan portfolio by 11% year-over-year. By comparison, BB&T saw growth of 9.3%, SunTrust reported average loans up 3%, and PNC grew loans by an impressive 17%. That being said, I should point out that PNC continues to mention their RBC Bank acquisition as a key driver of their results. Without the RBC acquisition, it's possible M&T would have lead this group.

The Good And The Bad
While it looks like M&T did a good job of growing deposits and loans, their credit quality wasn't quite as good as some of their competition. M&T reported non-performing loans at 1.52% of total loans. While this was better than PNC at 1.75%, it trailed results from SunTrust at 1.27% and BB&T at 1.2%. Unfortunately for investors, this leads me to my first big concern. M&T has the second highest non-performing loan ratio of the four banks we've looked at, yet they have the lowest provision for loan losses. 

When a bank realizes it may have a problem loan, it sets aside money to cover this debt. Banks usually set aside more than $1 for each potential $1 of loan loss, because of the costs involved to settle these accounts. For instance, BB&T's coverage ratio is 146%, PNC's coverage ratio is 124%, and SunTrust's ratio is 180%. This means each bank has at least $1.24 for every $1 of problem loans. M&T's current ratio is 91.68%. This less than 100% coverage ratio means, if the bank doesn't see an improvement in their non-performing assets, they may have to take a charge in future quarters to deal with these potential losses.

The second big issue facing M&T is, the direction of their outstanding shares. While several banks have announced share repurchase programs to offset dilution from stock options, M&T has allowed its outstanding share count to climb every quarter for the last five. Since the company's outstanding shares are 2% higher on a year-over-year basis, this means M&T must produce 2% more in earnings growth just to produce flat results.

Is This Really A Big Deal Or What?
I know some investors would say, these two “issues” aren't really that big of a deal, and they will stick with M&T. Of the four banks we've looked at, it's pretty easy to stick with M&T over PNC Bancorp. PNC has a lower expected growth rate at 6.05% versus 8.1% at M&T. M&T also has a higher yield at 2.68% versus 2.53%. Since PNC has a higher percentage of non-performing loans, that somewhat completes the argument for sticking with M&T. 

However, it's a different ballgame when you compare M&T to BB&T and SunTrust. BB&T has a higher yield at about 3%, better expected growth at 10.8%, and a lower non-performing percentage. The fact that BB&T sells for a lower forward P/E ratio is just icing on the cake. SunTrust is expected to grow earnings at nearly twice the rate of M&T over the next five years, yet the shares sell for a lower forward P/E ratio. While SunTrust's dividend can't match M&T currently, this has a lot to do with SunTrust's credit issues. With the company's recent sale of its 60 million shares of Coca-Cola, this move helped to shore up the balance sheet, and should lead to better distributions in the future.

While it's true M&T just reported an impressive quarter of growth, if the bank continues to allow its share count to grow, earnings comparisons are going to get more difficult. If the company doesn't set aside enough money for potential problem loans, earnings could take a hit because of this as well. The bottom line is M&T has huge growth, but investors need to question if this growth will last.


MHenage has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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