Skip to Content
Stock Strategist

M&T Is One of the Best Underwriters We Cover

The undervalued bank has good management and a stable franchise.


M&T Bank (MTB) is a midsize bank under exemplary management that has consistently prioritized shareholder returns through a combination of excellent underwriting, efficient operations, and savvy acquisitions. M&T has historically been a quality company, with one of the best underwriting histories of the banks we cover; even Warren Buffett’s Berkshire Hathaway has taken a stake in it.

M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. Much of the company’s loan book is composed of commercial loans, which tend to be the fastest to reprice in a falling interest-rate environment. Investors should be aware of this as we are entering into a very uncertain time with regard to the future rate environment. The remaining one third of revenue comes from nonbanking businesses like wealth management or deposit service fees, which tend to scale well and are less tethered to interest rates. We think that M&T has a comfortable barrier to entry in these operations due to its scale as well as its strong relationships with depositors and customers. The bank has an especially strong position in its commercial real estate operations in the U.S. Northeast. Its mortgage banking operation does have an element of cyclicality to it, again, partially tied to rates. Either way, we don’t see the bank’s competitive positioning in these markets changing, even if the macro backdrop does.

We like M&T’s acquisition style of purchasing distressed banks at reasonable prices. M&T has done a good job of using mergers to gain access to worthwhile regions and customers and has been effective in integrating operations. Though we are not explicitly forecasting any acquisitions, we think that in the event of a bank crisis, M&T’s credit advantages would probably put the company in a good position to purchase and gain share.

Narrow Moat From Cost Advantages and Switching Costs
We believe M&T Bank has earned a narrow economic moat because it possesses sustainable cost advantages and switching costs that are consistent with our bank moat framework. Spread-earning banks generally earn moats by paying less interest on deposits, controlling noninterest expenses, and/or managing credit costs better than their peers. These factors lead banks with moats to have sustainably higher returns on equity than their cost of capital. We assign a 9% cost of equity to all U.S. regional banks and project M&T Bank to easily exceed this hurdle with returns on tangible common equity averaging 17% over the forecast period. Our analysis shows that M&T bank has built a narrow moat through sustainable controls in its deposit costs, operating expenditures, and credit costs.

M&T Bank’s low-cost deposit base gives the company a deposit cost advantage, and its strong relationships with customers result in switching costs. Evidence shows M&T retains higher proportions of non-interest-bearing deposits in a variety of interest-rate environments. Further, the bank has a number of strong commercial relationships where deposit pricing can be made in the context of the total relationship. Both of these factors lead us to expect that M&T will maintain its sustainably lower interest costs relative to total deposits.

M&T Bank has strong operating efficiency, which bolsters its narrow moat. Its efficiency is demonstrated through the efficiency ratio, which has consistently been below 60% in almost all environments. We are confident in M&T’s ability to continue managing noninterest costs. We think that the relatively low noninterest expense is a function of the company’s scale and concentration of deposits (nearly 90% of deposits are in M&T’s top 10 metropolitan statistical areas) since noninterest expenses do not scale with deposits. Given its regional focus, we do not expect M&T to seek deposit growth in unproductive areas outside its region.

M&T Bank adds to its moat by underwriting quality loans, thereby controlling credit costs. M&T has one of the best underwriting histories of the banks we cover and has consistently outperformed peers through multiple downturns. M&T controlled its charge-offs relative to average loans quite well during the financial crisis, even though about half of its loans were exposed to real estate in 2008. Its credit cost advantage is based on the company’s well-established focus on risk-adjusted yield, which was set in place by the late longtime CEO Robert Wilmers. We do not expect this credit culture to change because the current management team was promoted from within the company and was trained under Wilmers. While most banks have low credit costs today, we think this moat source will be a greater differentiator once the credit cycle inevitably turns.

From a systemic standpoint, we believe the U.S. banking system has improved over the last decade, as capital levels supporting the banking system are at all-time highs. Further, regulation has become considerably stronger in the past several years. The U.S. banking market is quite fragmented, and M&T must compete with a variety of regional and community banks as well as large money center institutions, although this fragmentation has gradually decreased since the 1990s. While we do view the banking sector as intensely competitive, we note that the largest banks by asset size have generally been able to earn higher returns on equity for the last several decades and still do so today. Our outlook is generally positive from a macroeconomic and political standpoint for the U.S. banking system, as the United States is still the world’s leading democracy, has increased GDP at a steady pace for years, and maintains the world’s reserve currency, all of which contribute to banking stability.

With updated banking regulations, M&T is now considered a Category IV bank, and its regulatory burden has been reduced. Currently, the bank is only subject to biennial stress tests by the U.S. Federal Reserve, is not subject to any leverage ratio requirements, and is also free from more stringent liquidity requirements.

Economic Uncertainty Adds Risk
We view the macroeconomic backdrop as the primary risk to the bank. M&T’s profitability is largely determined by the interest-rate cycle and the effects of credit and debt cycles, all of which are not under management’s control.

Over the long term, credit quality has been good. However, M&T is not immune to the overall credit environment. Its exposure to the commercial real estate market is relatively high, and M&T has a presence in expensive markets, like New York and Washington, D.C. If these areas were to experience greater economic troubles, the bank’s earnings could suffer. Like most of its peers, M&T is also subject to the vagaries of interest-rate movements, and rate cuts present a challenge. A reversal of the corporate tax reform would damage M&T’s bottom line. None of these risks are under management’s direct control.

We normally assign our U.S. regional banks a medium uncertainty rating. However, because of COVID-19 and the increasing uncertainty around the economy and the potential downside, we currently assign M&T a high uncertainty rating.

We think M&T is in good financial health. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio of 9.7% as of December 2019.

In our view, poor underwriting is the largest risk to shareholders’ capital in the banking business, and M&T has excelled in this regard. M&T consistently underwrites loans better than its peers, as evidenced by its low charge-offs through multiple cycles, including during the financial crisis of 2007; this allows M&T to maintain cash payouts to shareholders during some of the toughest downturns.

Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.