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

Narrow-moat-rated M&T Bank MTB reported decent second-quarter results, which supported 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 EPS of $5.05 beat our own estimate (of $4.31) and the FactSet consensus (at $4.16), largely due to a one-time gain on the sale of the bank’s Collective Investment trust, or CIT, unit. Adjusted EPS of $4.11 was closer to our estimate, with the main difference being slightly higher expenses.

M&T Bank’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-$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 the regional banks, we are seeing a pattern of slightly worse NII outlooks from them, although the revisions to these outlooks 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 we’re past having to fear major deposit surprises for the industry.

We went into this quarter’s earnings season believing that the sector was undervalued, and while it is extremely difficult to time sentiment shifts for the banks, it seems that 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, though it may decline slightly. We would still view shares as modestly undervalued.