This Bank Has 3 Problems, But 1 Trumps Them All

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

It’s hard to argue with investing in a large bank that is growing at a decent rate. However, I’m here to do exactly that. Of the few problems facing M&T Bank (NYSE: MTB) today, only two of the four problems are fixable by harder work and better results. The other two problems are lurking behind the scenes, and that’s the biggest risk of all. Investors might not realize that this seemingly safe bank is having very real problems.

Long-Term Relationships Not Short-Term Accounts
Banking is actually a very simple business when you get right down to it. Traditional banks still need loyal depositors, loans that are paid on time, and they need to keep their costs down. These are some of the same principles that made a bank successful 20 or 30 years ago, and they still apply today.

The first issue I see in M&T’s last earnings report, suggests that even though they are attracting deposits, they may be losing market share. The company competes with banks like BB&T (NYSE: BBT), PNC Bancorp (NYSE: PNC), and U.S. Bancorp in different parts of the country. While M&T did report overall deposit growth of 7%, this actually was only good enough for third best among their peers.

By comparison, BB&T was the only bank to report slower overall deposit growth at 4.7%, but PNC grew deposits by 9%, and U.S. Bank grew their deposits by 7.3%. While it’s true that M&T grew their non-interest bearing deposits by 14%, their interest bearing deposits increased by just 3%. This small increase suggests that M&T may not be getting the whole relationship from their clients, and instead just settling for a checking account. This lack of the whole relationship makes the account less sticky, and harder to keep if another bank offers a promotion.

I’ve seen this with my own eyes, as the company has offered as much as a $75 new checking account bonus to try and gain business. This type of cash for an account promotion likely leads to a lot of checking accounts that have no real loyalty to the bank. Longer-term, the bank needs to focus on gaining long-term customers and not buying business for the short-term.

Like Dominoes Falling
It seems like the analysts following M&T are seeing the same issues that I’ve noticed. This is the second problem facing M&T, analysts expect the slowest growth relative to their peers. In the next few years, M&T is expected to grow earnings by 7.62%. This might sound okay, until you realize that PNC is expected to grow by 7.8%, BB&T is expected to grow by 8.33%, and U.S. Bancorp is expected to grow by 9.71%.

I’m sure part of the reason analysts aren’t expecting better growth has to do with M&T’s non-performing loans. Of their peers, M&T has the second worst non-performing percentage at 1.6%. The only bank with a higher non-performing percentage is PNC Bank at 1.83%. Relatively speaking, BB&T and U.S. Bank are playing on a different level, with non-performing loan ratios of 1.12% and 1.35%.

The biggest difference between these banks beyond their non-performing loan percentage is the rate of decrease in these problem assets. BB&T and U.S. Bank not only have lower non-performing percentages, but they each saw a decline of at least 34% in these assets versus last year.

By comparison, PNC’s percentage is the highest and the company witnessed a 4% decline, but M&T’s percentage is the second highest, and they saw a decline of just 1.87% year-over-year. The bottom line is, these two banks are doing worse than their peers, and M&T saw the least improvement of the group.

The biggest issue facing the bank is they seem to be deluding themselves into believing that their portfolio is getting better, when in fact it’s getting worse. In the last three quarters, look at the difference between their non-performing loans, and their allowance for credit losses:

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As you can see, M&T’s non-performing loans are growing, while the bank has actually lowered slightly its loan loss reserves. If this trend doesn’t improve, the bank may have to take a charge against earnings to allow for greater losses.

Better Options
Investors need to realize what they are getting with M&T. The bank isn’t growing deposits at the same rate as several of their peers. Their non-performing loan percentage is the second worst and isn’t improving. In addition, the bank is releasing loan loss reserves in anticipation of better credit quality. This doesn’t sound like the recipe for a winning investment to me.

Given the alternatives, either BB&T or U.S. Bank look like better options. Both banks are expected to grow faster than M&T, have lower projected P/E ratios, and much better credit quality. If you want more information about these two banks, consider adding BBT and USB to your personalized Watchlist to keep up with developments. Just don’t wait too long to decide, M&T stock isn’t far from its 52 week high, but if the bank’s credit quality issues persist, it might be a while before the stock sees this level again.

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Chad Henage owns shares of BB&T.; 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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