The Long and Short

Strong reception for M&T underscores relative value

| December 13, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The pricing of the latest offering from M&T Bank (MTB: Baa1/BBB+/A) demonstrates that MTB remains among the top relative value picks in the domestic banking sector and currently appears particularly favorable among category IV US regional banks, those with $100 billion to $250 billion in total assets. MTB performed admirably in the wake of the 2023 regional bank crisis, which highlighted the bank’s stable deposit base and relatively consistent earnings through those challenging quarters. MTB bonds should be targeted as part of an overall strategy to overweight US regional banks for 2025.

On Tuesday, MTB priced $500 million of a 4NC3 sustainability bond at a spread of 72 bp over the Treasury curve compared to initial price talk of 105 bp. The bank also priced $1 billion of an 11NC10 note at a spread of 117 bp versus initial price talk of 145 bp. The bonds came with limited concession to secondaries and spreads on the longer-dated note have already tightened by about 5 bp since issuance. While this has limited some of the near-term opportunity for spread compression, the name still offers good value overall across the intermediate curve to its peer group, especially relative to its solid ratings profile (Exhibit 1).

MTB boasts an enviable operating footprint with nearly 1,000 branches throughout the Northeast (NY, NJ, PA, New England) and Mid-Atlantic (DE, MD, DC, VA, WV) states. The bank expanded gradually since the Global Financial Crisis, and made its most meaningful acquisition in recent years in a deal for People’s United Financial for total equity value of $8.3 billion that closed in 2022. Total assets increased to just over $200 billion at year-end 2022 from $155 billion at year-end 2021. Since then, growth appears to have leveled off with assets remaining at $212 billion as of the most recent quarter. Total deposits increased to $165 billion as of third quarter 2024 from $132 billion at year-end 2021. Management will likely be reluctant to pursue a rapid growth or M&A strategy that would potentially land them above the $250 billion asset threshold, making the bank subject to more stringent regulatory oversight, unless it were to consider a more transformative merger further down the road. A deal of that nature would fall under considerable regulatory scrutiny and therefore be unlikely leave creditors with materially diminished capital ratios.

Exhibit 1: US investment grade regional bank credit curve

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications

The most criticized aspect of the bank, particularly in wake of the regional banking issues that have arose over the past two years, is its concentration in commercial real estate (CRE) lending. However, much of those concerns appear overblown (and priced in at current spreads). The bank has been making considerable progress in addressing those exposures in recent quarters, while improving capital ratios and reporting solid overall earnings results. For example, total CRE exposure relative to their total loan book fell to 21% in the second quarter of 2024 from 26% a year ago. MTB is bringing the total down through low originations and paydowns. Meanwhile, total office exposure within the CRE book, a top concern among bank investors right now, is less than 3.5% of total lending with the criticized portion of those loans representing a highly manageable 0.9% of all loans as of as of the third quarter. Simultaneously, the bank improved its capital ratios, with the CET1 ratio improving to 11.54% from 10.98% as of year-end 2023.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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