Risk-Reward Balanced at M&T
We have reiterated our Neutral recommendation on M&T Bank Corp. (MTB), based on its better-than-expected second quarter 2012 results, strategic acquisitions and its preferred stock sale by the Treasury.
Solid Second Quarter Performance
M&T’s second quarter 2012 operating earnings of $1.82 per share were well ahead of the Zacks Consensus Estimate of $1.68 and surpassed the prior-quarter earnings of $1.59 per share. The results were aided by increased net interest and non-interest income as well as lower operating expenses. Moreover, mortgage banking revenues posted a decent rise in the quarter.
Recent Acquisition Deal
M&T has agreed to takeover Hudson City Bancorp Inc. (HCBK) in a cash and stock deal worth $3.7 billion, based on M&T’s closing stock price on August 24. The bank deal, announced on August 27 and the largest this year, would lead to an expansion of M&T Bank’s franchise in eastern U.S. and make it the company with the fourth largest deposit share in New Jersey. The deal awaits regulatory and shareholders’ approval.
Including M&T Bank’s existing branches, the 135 additional branch offices from Hudson City, sited at New Jersey, New York and Connecticut, would lead to a combined network of 870 branches ranging from Connecticut to Virginia with little overlap. We expect the deal to be a strategic fit for M&T. It is projected to add to the company’s earnings per share and capital ratios immediately.
As a matter of fact, following the financial crisis, the market witnessed a surge in the number of distressed banks ready to be taken over by their stronger counterparts and M&T capitalized on such opportunities. It has been making strategic acquisitions in an endeavor to augment its business.
In 2011, M&T completed the acquisition of Wilmington Trust, which provided it with a leading deposit market share in Delaware. Moreover, in the past, the purchases of Provident and Bradford in May 2009 in the Mid-Atlantic region have proved worthy, both in terms of customer base and profitability. We believe such opportunistic acquisitions poise M&T well for growth in the future.
Treasury Stake Sale
Moreover, in mid-August, the U.S. Treasury announced a public offering of the preferred stock worth $381.5 million that it holds in M&T. The move came as part of its efforts to unwind its bailout program. Public investors will now be able to hold the stock.
Notably, compared to a number of its Wall Street counterparts, the company made a slow exit from the TARP as it has been quite hesitant in raising capital through common stock offerings. An exit from TARP is considered a positive move for M&T as it would free the company from significant government interventions, pay restrictions and allow financial flexibility. However, the prolonged period for making dividend payment has somewhat muted investors’ enthusiasm.
In Conclusion
With a robust business model and strategic acquisitions, the company is well poised for future growth. The company boasts of a solid financial and credit performance even in the midst of a dull economic environment.
Yet, a protracted economic recovery, regulatory issues and low interest rates remain the headwinds for M&T. Moreover, elevated levels of trust preferred securities in its capital and exposure to risky assets add to its woes.
Nevertheless, efforts to build up its capital levels and a growing core deposit, will uphold it in the long run. As such, the risk-reward profile for M&T seems balanced and therefore our Neutral recommendation remains in place.
The shares of M&T Bank Corp., however, retain a Zacks #2 Rank, which translates into a short-term Buy rating.
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