Loss provisions fell sequentially, with $725 million now taken in the first nine months of the year seen as adequate for loan defaults related to coronavirus shutdowns and high unemployment. We expect the net interest margin to remain under pressure until 2Q21, a year after the Fed’s emergency rate cuts.
M&T tends to trade at a premium to its regional bank peers, which we believe reflects the company’s historically consistent (though below-peer-average) loan growth, above-average credit quality, strong efficiency, and potential as an acquisition candidate.
The stock’s current multiple of about 10-times our 2021 EPS estimate is near the peer average. We do not expect significant multiple expansion in the near term.
Over the past year, MTB shares have fallen 32%, versus a 12% advance for the broad market.
On October 22, M&T reported adjusted 3Q20 earnings of $2.77 per share, down from $3.50 a year earlier but above the $2.60 consensus. The results excluded $0.02 per share for the amortization of core deposits and other intangible assets. Revenue declined 6% to $1.46 billion.
Average earning assets increased 18% year-over-year, to $127.7 billion, as commercial customers drew down lines of credit and the company participated in Payment Protection Program lending. However, the net interest margin narrowed to 2.95% from 3.78%, leading to an 8% decline in net interest income. The loss provision was $150 million, up sharply from $45 million a year earlier, as the company continued to prepare for defaults due to the coronavirus. Net charge-offs were 0.12% of average loans, down from 0.16% a year earlier, as defaults have not yet materialized.
In July 2019, M&T sold its interest in an asset manager from the 2011 acquisition of Wilmington Trust Corporation, which resulted in a $48 million charge to reduce carrying value. The impact of the charge was a $36 million decline in net income after taxes.
EARNINGS & GROWTH ANALYSIS
We expect revenue to be down about 5% in 2020, hurt by a narrower net interest margin due to lower interest rates and reduced fee-based income. The 3Q20 net interest margin was 2.95%, down significantly from 2Q, as emergency Fed rate actions that pushed interest rates to near zero continued to affect earning assets.
Credit losses remain a wild card for near-term earnings, but we believe the $725 million loss provision in the first nine months of 2020 is adequate for expect defaults by businesses and consumers. Net charge-offs have averaged only $50 million per quarter so far in 2020, though we expect a spike in 2021 as loan forbearance measures run off and unemployment remains high. Management noted on the 3Q earnings call that its forecasts assume a high single-digit unemployment rate through 2022.
The company has held expense growth in check, in our view. The adjusted efficiency ratio (noninterest expense divided by net revenues) has held at about 56%. Looking ahead, the company expects to achieve continued positive operating leverage.
With a lower-than-expected loss provision in 3Q, we are raising our 2020 EPS estimate to $9.10 from $8.73. But with the economic recovery likely delayed into next year, impacting loan growth, we are lowering our 2021 forecast to $9.90 from $10.36.
FINANCIAL STRENGTH & DIVIDENDS
Our financial strength rating on M&T Bank is Medium-High, the second-highest point on our five-point scale.
M&T estimates that its Tier 1 common equity ratio was 9.81% at September 30, 2020.
In early 2019, the Federal Reserve agreed to exempt banks with assets of $100 billion to $250 billion, including M&T, from the 2019/2020 supervisory stress testing cycle. M&T repurchased 2.58 million common shares in 1Q for $374 million, but does not plan additional buybacks, through at least the fourth quarter, in order to conserve capital.
The current dividend rate is $1.10 per quarter. Our dividend estimates are $4.40 for 2020 and $4.56 for 2021. The yield is about 4.2%.
MANAGEMENT & RISKS
In December 2017, M&T Bank appointed Rene Jones as chairman and CEO, replacing Robert G. Wilmers, who passed away unexpectedly. Darren King is EVP and CFO.
In our view, MTB management is transparent with investors and provides reliable financial guidance during its quarterly earnings calls. This includes forecasts for loan growth and credit quality, net interest margins, and operating expense trends.
The company faces risks from general economic conditions, credit and financial market disruptions, interest rate movements, and changes in regulations.
Headquartered in Buffalo, New York, M&T Bank Corp. is a bank holding company that operates branch offices in New York, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia. The company was founded in 1856.
MTB trades at 11.3-times our depressed 2020 EPS estimate, which includes substantial loan loss provisioning. The level of loan defaults remains a wild card for earnings in 2020/2021, but we believe the allowance for credit losses, at 1.79% of loans at September 30, offers good protection. We believe that the shares are fairly valued at 10.4-times our 2021 EPS estimate, factoring in a sharply lower loss provision, and that a HOLD rating remains appropriate.
On October 26, HOLD-rated MTB closed at $103.27, down $2.85.