DBRS Confirms M&T Bank Corporation at A (low); Maintains Stable trend on Acquisition Announcement

DBRS, Inc. (DBRS) has today confirmed the ratings of M&T Bank Corporation (M&T or the Company) and its rated subsidiaries, including M&T’s Issuer & Senior debt rating of A (low). The trend on all ratings remains Stable. The rating action follows the Company’s announcement of its intent to acquire Hudson City Bancorp, Inc. (Hudson City) in a stock and cash transaction valued at $3.7 billion. Subject to regulatory and shareholders approval, the transaction is expected to close by 2Q13.

DBRS views the acquisition as being consistent with M&T’s opportunistic strategy of buying banks at a rational price with compatible corporate cultures. The internal rate of return on the acquisition is expected to be over 18% and M&T anticipates the deal will be immediately accretive to earnings. The Hudson City acquisition bolsters the Company’s presence in the New York City metropolitan region and provides it with the opportunity to offer a broader and deeper product set through the Hudson City branches. Operating expense saves are expected to be roughly 24%. DBRS notes that it remains to be seen whether the Hudson City branch locations are optimal for M&T or what level of investment would be needed to optimize these branches. Overall, the Company expects restructuring charges to total $223 million.

DBRS notes that M&T is acquiring a thrift with significant interest rate risk. Specifically, Hudson City’s earnings have been pressured by high borrowing costs and low earnings asset yields. M&T plans to mitigate this risk through restructuring Hudson City’s balance sheet. Indeed, after the close of the transaction, M&T will sell off Hudson City’s good quality securities portfolio and use the proceeds to repay its higher cost borrowings.

Hudson City, a $44 billion in assets thrift, headquartered in Paramus New Jersey has 135 branch offices in New Jersey, New York and Connecticut. Typical of most thrifts, Hudson City’s business is centered on originating loans secured by residential real estate. Positively, Hudson City’s asset quality is relatively sound, as loss rates remain low, despite elevated nonaccruals. It is DBRS’s view that future losses related to Hudson City’s loan portfolio will remain manageable and cushioned by credit marks taken by M&T.

DBRS anticipates that integration risk will be manageable, especially given M&T’s experience in integrating numerous bank acquisitions. DBRS notes that M&T is acquiring a fairly straightforward monoline business, which should also reduce integration risk. Nonetheless, with $44 billion in assets, the Hudson City acquisition is the largest in the Company’s history.

Given M&T’s fairly conservative risk profile, the Company has historically operated with a moderately sized capital position. Positively, the Company expects the Hudson City transaction to be accretive to capital. On a pro forma basis, M&T anticipates that its Tier I common ratio will be between 8.3% and 8.5% at June 30, 2013.

The ratings confirmation reflects M&T’s strong Northeast and mid-Atlantic commercial and consumer banking franchise, which is underpinned by sound asset quality, a solid funding profile and sound earnings generation. Ratings also reflect its large CRE concentration particularly within the New York City market and moderate capitalization compared with its similarly rated peers. Positively, the acquisition of Hudson City will reduce M&T’s CRE concentration, which DBRS views favorably.

Headquartered in Buffalo, New York, M&T Bank Corporation reported $81 billion in consolidated assets as of June 30, 2012.

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 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
Rating Committee Chair: 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.