DBRS Comments on M&T Bank Corp.’s 2Q12 Results; Ratings Unchanged – Senior at A (low), Stable Trend

DBRS, Inc. (DBRS) has commented today that its ratings for M&T Bank Corporation (M&T or the Company), including its A (low) Issuer & Senior Debt rating, are unchanged following the release of the Company’s 2Q12 results. The trend on all ratings is Stable. M&T reported net income available to common shareholders of $214.7 million for 2Q12, up from $188.2 million for 1Q12. On a QoQ basis, M&T’s earnings benefited from loan growth, higher fee income, and a decrease in noninterest expense. Specifically, M&T’s higher QoQ net earnings reflected a $42.5 million, or 4.3%, increase in total revenues and a $12.3 million, or 1.9%, decrease in noninterest expense. Partially offsetting these tailwinds, provisions for loan loss reserves increased by $11 million, or 22.5% sequentially, partly reflecting new loan growth.

The increase in total revenues was driven by higher spread income (up 4.4%) and an increase in fee income (up 4.0%). Higher QoQ net interest income was attributable to a 5 basis point widening of net interest margin (NIM) to a solid 3.74% and a 3.0% increase in average earning assets. The wider NIM reflected an improvement in estimated cash flows from acquired loans, partially offset by a sizable increase in lower yielding cash balances at the Fed. Positively, the Company reported loan growth during the quarter, including commercial & industrial, residential mortgage, and commercial real estate loans. DBRS notes that M&T’s loan growth benefitted somewhat from a large competitor’s divestiture in western New York.

Excluding non-core items, including other-than-temporary-impairment (OTTI) charges of $16.2 million in 2Q12 and $11.5 million in 1Q12, M&T’s fee income increased by 5.2% sequentially. Higher fee income was mostly driven by increased levels of mortgage banking and trust revenues. DBRS notes that the OTTI charges for both quarters were related to the Company’s portfolio of private label MBS. DBRS comments that M&T holds approximately $1.4 billion of these somewhat riskier securities, which may result in additional, albeit manageable, future OTTI charges.

The QoQ reduction in expenses was mostly attributable to the non-recurrence of several seasonal items reported in 1Q12, including higher costs related to stock-based compensation, unemployment insurance, payroll related taxes and employer contribution to retirement savings. DBRS anticipates that future expenses will remain well controlled.

Although still pressured by the protracted slow growth economic environment, M&T’s asset quality remains sound. Specifically, at June 30, 2012, nonaccrual loans represented a manageable 1.54% of net loans, down from 1.75% at March 31, 2012. Meanwhile, 2Q12 net charge-offs (NCO) expanded modestly to 0.34% of average loans, up from 0.32% for 1Q12. Finally, DBRS notes that M&T’s allowance for credit losses remains solid at 1.46% of total loans.

The Company’s solid funding profile is underpinned by a low cost core deposit base that mostly funds its loans. Rounding out its liquidity profile, M&T has a moderately sized securities portfolio and ample access to the FHLB and the Federal Reserve, if additional funding is necessary.

Reflecting M&T’s fairly conservative risk profile, the Company has historically operated with a moderately sized capital position. During 2Q12, the Company’s capital position improved as its tangible common equity ratio increased to 6.65% at June 30, 2012 (6.51% at March 31, 2011) and estimated Tier 1 common ratio increased to 7.15% (7.04% at March 31, 2011). DBRS notes that M&T’s capital structure still contains $381.5 million of TARP funds.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Alan G. Reid
Initial Rating Date: 14 July 2005
Most Recent Rating Update: 23 March 2012

For additional information on this rating, please refer to the linking document under Related Research.