M&T Bank Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

M&T Bank Corporation is a regional banking company serving New York, Maryland, Pennsylvania, New Jersey, Delaware, Connecticut, West Virginia, Virginia and the District of Columbia, focusing on commercial and retail banking, and wealth management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

M&T Bank, or M&T, operates as a commercial bank with a significant presence in the Northeastern and Mid-Atlantic United States.

Business Overview and Competitive Landscape

Geographic Footprint: MTB operates through a wide network of branches, primarily in New York, Maryland, Pennsylvania, New Jersey, Delaware, Connecticut, West Virginia, and Virginia. A significant portion of its activities are concentrated within these densely populated regions, giving it a strong regional advantage.
Diversified Operations: The Company is diversified across three main areas. The Commercial Bank provides traditional loans and banking services, the Retail Bank does small business banking and the Institutional Services and Wealth Management segment deals with investment services.
Loan Portfolio: The loan portfolio is heavily concentrated in commercial real estate, which is more than 10.8 billion. Other segments, like residential mortgage, consumer and credit card loans, are much smaller and less significant than CRE.
Stable and Consistent Growth: The Company had relatively stable and consistent growth in the past. This has now been greatly hampered by the regional bank crisis of 2023-2024.
Emphasis on Relationship Banking: M&T has historically emphasized building relationships with its customers, believing that local knowledge is better at handling risks, and helping the Company maintain a higher return on equity. This was true before the bank failures and recent crises, during which many small and regional banks were found to be mismanaged.

Moat Assessment: 3/5

Switching Costs: M&T benefits from the high switching costs in the financial industry. Clients are generally unlikely to switch banking partners frequently due to the hassle and inconvenience, which provides stability in its deposit base and therefore gives pricing power.
Network Effects: While banks don’t typically benefit from direct network effects, the localized nature of M&T’s operations gives it a benefit. M&T bank accounts are more appealing to people in the area, because they know it is very prominent in the area, which attracts more customers and therefore more deposits, helping the bank get cheaper funding.

Established Presence and Brand: M&T has a long-standing presence in its operating region, which helps to cultivate a stable customer base. This has also helped create a brand that is trusted within that region.
Limited Geographic Reach: M&T has a concentrated geographic focus which limits the reach of the Company.
Moderate Moat: M&T’s moat is moderate because of those attributes, which should allow the Company to continue to compete effectively. A rating of 3 is appropriate because it’s moat is wide enough to be meaningful, but not wide enough for it to withstand most major disruptions, such as the regional bank crisis and interest rate hikes.

Legitimate Risks to Moat and Business Resilience

Interest Rate Sensitivity: M&T’s profitability is highly sensitive to changes in interest rates, due to maturity mismatches in its assets and liabilities. Interest rate hikes increase funding costs and decreases net interest margin. A rising interest rate environment will put the company under pressure, especially with its large commercial real estate portfolio.
Credit Risk Exposure: The loan portfolio is concentrated in commercial real estate, a segment that has a greater chance of facing losses and defaults than other segments. This makes M&T susceptible to downturns in this industry.
Macroeconomic Factors The company is exposed to macroeconomic risks such as high interest rates, recession or slowing down of the economy. These events can decrease demand for the bank’s products, which can greatly harm revenues and profits.
Regulatory Changes: Banks operate in a heavily regulated environment and changes in regulation can make operations and profitability more difficult or less profitable. Any change in regulations will affect all banks, not just M&T and so doesn’t destroy it’s moat.
Technological Disruption: The banking industry is facing disruption from financial technology startups. These startups may steal market share due to their more cost effective or more convenient methods of operations. This is a risk for most legacy banks as they may not be able to compete or keep up with the current tech trends.
Competition Competition from both other banks and non bank lenders may erode M&Ts profitability, pricing power and therefore reduce it’s moat.

Despite those risks the Company has shown resilience through past recessions and financial crises. The Company also has a long history of delivering good results, a focus on high return on equity and a conservative, community driven approach, that will serve it well in the future.

In-depth Financial Analysis

Revenues: The company derives its income from 3 primary sources. Net interest income was $6.1 billion in 2022, which is the largest part of the Company’s revenues. Other revenues such as commissions, brokerage and other fees totaled $1.9 billion. In recent years, this segment has grown significantly, while the net interest income has decreased because of the inverted yield curve. In all, revenues were $8.0 billion in 2022, representing a modest growth of 5.6% from the year before. M&T, like most banks, had a decrease in revenues due to rapidly rising interest rates, but it expects it to recover as the Fed starts to lower rates.
Margins: M&T’s operating margins are around 30-40% which is lower than many other competitors. The Company’s operating margins have also been relatively stagnant, failing to expand over the years. This could signify an inability to lower costs further, which gives M&T less flexibility.
Profitability: M&T’s returns on equity were just around 12% in 2022, a far cry from it’s more normalized 15%. This decrease is mainly because of the effects of the increasing interest rate environment. It is expected to return to it’s more normalized rates as soon as the Fed starts cutting rates again, and the yield curve starts to normalize.
Loan Loss Provision: Provisions for loan losses have increased substantially. Provision for credit losses was $828 million in the third quarter of 2023, and $1.47 billion in the fourth quarter. These provisions are related to the increase in charge-offs of bad debt, and are a direct result of the recent regional banking crisis and a greater likelihood of defaults, due to rising rates. This is expected to normalize as the economy improves, and interest rates are cut.
Capital Structure: The company finances it’s business through debt and equity, as is normal in the banking sector. M&T holds a substantial amount of debt on its balance sheet, and as a result has higher financial risk, though still manageable.
Key Metrics: In the last 10-Q, Net Income was $502M. Net Interest Income was at $1.66B for the quarter, while net charge-offs were at $133M. Provisions for credit losses was reported at $305M. Return on average assets (ROA) was at 0.49%, while returns on average equity (ROE) was at 3.64%. This shows a significant decrease in profitability caused by the rapid changes in the market, though it is still profitable. The net-charge offs, however, is troubling.

M&T’s financial statements are impacted greatly by interest rate risk and economic downturns. It was affected greatly by the regional banking crisis of 2023-2024, but it is expected to recover in the coming years.

Understandability: 2/5 M&T Bank’s operations can be considered a 2/5 on understandability. The basic concepts of commercial banking are not hard to understand but the nature of the industry, the complexities in its financials, and it’s regulatory burdens do make it more complicated to value and assess, than a company in other industries.

Complex Operations: Banks have multiple ways to bring in profits, with each stream being separate and therefore requiring a deeper analysis to determine the drivers. This makes banks more complicated to understand than other companies.
Balance Sheet and Leverage: Balance sheet items (loans, deposits, and securities) all require specialized knowledge to accurately evaluate. Understanding leverage as it relates to bank profitability is difficult as well.
Regulatory Framework: The banking industry is highly regulated with many different rules and regulations, which can be hard to follow. Understanding the effect of certain regulation on the financials requires time.

Balance Sheet Health: 3/5

M&T’s balance sheet is in a relatively healthy state with moderate amount of risk. A rating of 3 is appropriate as it can withstand moderate economic shock.

Capitalization: M&T’s capital is considered adequate, and in line with regulatory requirements. It’s CET1 ratio was at 10.6%, well within regulatory minimums, meaning the bank has a good amount of equity for its operations.
Leverage: Leverage is high relative to many other industries, but this is inherent to the banking sector. In the previous year the bank had total assets over $214 billion, with liabilities over $192 billion. This implies significant leverage that is relatively normal for a bank, but still indicates high leverage and susceptibility to large downturns.
Liquidity: The Company has a considerable portion of it’s balance sheet in liquid assets, which gives it financial flexibility and reduces liquidity risk.
Non-Performing Loans The company had significant increases in non-performing loans. Further, there is still a significant amount of loans classified as criticized, which may mean more loan defaults in the future. Both indicate there is potential credit risk.

Controversies and Recent Problems

Regional Bank Crisis: M&T has been affected by the regional bank crisis in 2023. This resulted in a decrease in market cap, and also led to an increase in loan loss provisions. M&T has been criticized for poor risk management, along with other regional banks. The current market conditions and high interest rates have greatly impacted the valuation of the Company. Management expects for rates to begin to reverse, which would alleviate pressure. They also expect to get past this phase through conservative lending, and further improvement in operations.
Interest Rate Risk: The rapid rise in interest rates has negatively impacted the Company’s net interest margin and resulted in a lower stock price. Management believes that the yield curve will normalize in the near future, which should improve profitibility again.

Overall, M&T is a regional bank with a moderate moat, though it will be interesting to see how it fares as regulation gets tighter and the yield curve normalizes.