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Organic growth supports M&T Bank (MTB), cost issues persist

On September 25, we published an updated research report on M&T banking company Mountain biking. The growth outlook for the Buffalo, NY-based banking giant looks encouraging as it continues to show strength in several areas, including organic growth through rising loans and deposits, as well as its inorganic growth strategies. However, persistent increases in non-interest operating expenses, deteriorating credit parameters and lack of diversification in its loan portfolio are concerns.

The company has seen upward revisions to estimates, reflecting analyst optimism about its growth prospects. Over the past 30 days, Zacks’ consensus estimate for its 2020 and 2021 revenue has shifted north.

The shares of this company Zacks Rank # 3 (Hold) have, however, lost 10.8% in the last three months compared to the industrydecrease of 3%.

Based on its fundamentals, M&T Bank has been successful in continuing to grow its net interest income (NII) in a competitive business scenario. Although the NII declined in the first half of 2020 due to lower interest rates, over the past five years (end of 2019) it has seen a compound annual growth rate (CAGR) of 9.8%.

M&T Bank’s non-interest income is also impressive. Remarkably, the company saw 11% growth and slight year-over-year growth in 2019 and the first half of 2020, respectively, with the mortgage market recovering and an improved business environment. Therefore, a continuation of such a trend is likely to support the expansion of sales in the quarters to come.

M&T Bank is focused on acquiring the best deposit franchise in the industry. Deposits posted a five-year CAGR of 1% (2015-2019), with some annual volatility. In addition, the company has seen decent loan growth over the past few years, with a five-year CAGR of 1% in 2019, with some annual volatility, mainly supported by the rise in consumer loans. Both measures continued to increase in the first half of 2020.

In view of the constant increase in non-interest operating expenses, M&T Bank is exposed to operational risks. Although spending has declined in the first six months of the current year, it has registered a CAGR of 5.3% over the past five years (2015-2019). Additionally, given ongoing investments in several areas, including operational infrastructure and technology, the company’s spending base is expected to remain under pressure.

The deterioration of credit indicators is an obstacle for the company. The allowance for credit losses experienced a five-year CAGR of 1% in 2019, with some annual volatility. In the first half of 2020, provisions increased sharply due to the adoption of a new accounting method and the coronavirus crisis. In addition, the company’s substantial exposure to commercial and real estate construction loans shows the lack of diversification, which can be risky for the bank in a difficult economic environment and competitive markets.

Actions to consider

TD Ameritrade Holding Corporation AMTD has witnessed upward revisions to estimates over the past 60 days. Additionally, this ranked (buy) stock of Zacks # 2 has gained 6.9% in the past three months. You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.

Morgan Stanley MS has witnessed upward revisions to estimates over the past 60 days. In addition, the company’s shares have lost 0.4% in the past three months. Currently, he carries a Zacks rank of 2.

Independent Bank Corporation IBCP has witnessed upward revisions to estimates over the past 60 days. In addition, the stock lost 14.3% in three months. He currently wears a Zacks Rank # 2.

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