M&T Bank Earnings: Net Interest Income and Funding Costs Largely Meet Our Expectations

M&T Bank Stock at a Glance

• Fair Value Estimate: $169.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

M&T Bank Earnings Update

M&T Bank MTB reported decent second-quarter results, supporting our overall thesis that while there will be incremental pressure on funding costs and net interest income, or NII, it will be manageable. The bank’s earnings per share of $5.05 beat our estimate of $4.31 and the FactSet consensus of $4.16, largely due to a one-time gain on the sale of the bank’s collective investment trust. Adjusted EPS of $4.11 was closer to our estimate, with the main difference being slightly higher expenses.

M&T’s full-year outlook was modestly changed, as deposit costs are expected to come in slightly higher and NII is expected to come in at the low end of the previous range of $7.0 billion to $7.2 billion. We were already favoring the lower end of the range, so we do not expect to materially change our NII outlook.

As we digest these and other earnings from regional banks, we are seeing a pattern of slightly worse NII outlooks, although the revisions are smaller than what we saw last quarter. While we are not completely done with the current rate cycle, we are seeing a deceleration in surprises as we get closer to some sort of equilibrium. Overall, deposit costs tracked our updated expectations, as did the shift into interest-bearing balances, giving further confidence that we no longer have to fear major deposit surprises.

We went into this quarter’s earnings season believing the sector was undervalued, and while it is extremely difficult to time sentiment shifts for the banks, it seems the market is coming around to our view that stock prices were overcompensating for the types of pressures the industry was set to face. As we incorporate slightly higher expenses and the potential for increased regulatory capital requirements, we do not expect to materially change our current fair value estimate of $169 per share for M&T, though it may decline slightly. In that case, we would still view the shares as modestly undervalued.