DBRS Confirms M&T Bank Corporation at A (low); Maintains Stable Trend

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 ratings action followed a detailed review of M&T’s operating performance, financial fundamentals, and future prospects.

The Company’s ratings are underpinned by its strong and diverse northeast and mid-Atlantic commercial and consumer banking franchise, sound asset quality, solid funding and capital profile, and pressured, yet resilient earnings generation that benefits from an above-peer median level of fee income. Ratings also consider M&T’s large CRE concentration particularly within the New York City market, as well as the pending Hudson City Bancorp, Inc (Hudson City) acquisition.

The Company maintains a deeply entrenched banking franchise in the northeastern and mid-Atlantic states. Indeed, M&T holds the number two position in Maryland with 15% deposit market share, the number seven position in New York with 3% market share and the number six position in Pennsylvania with 3% market share. On a more granular basis, the Company holds top three market shares in many of the metropolitan statistical areas that it serves, including dominant positions in Buffalo with 47% of the market and Rochester with 25% market share.

In August 2012, M&T announced its intent to acquire Hudson City. DBRS views the pending acquisition as being consistent with M&T’s opportunistic strategy of buying banks at a rational price. DBRS notes that the acquisition will bolster the Company’s presence in the New York City metropolitan region, particularly New Jersey, and provide it with the opportunity to offer a broader and deeper product set through the Hudson City branches. The transaction has been delayed due to concerns with BSA/AML at M&T and the termination date has been extended again to December 31, 2014. DBRS notes that the Company entered into a written agreement with the Federal Reserve Bank of New York on June 17, 2013, to strengthen its BSA/AML systems and processes; an undertaking that management has taken very seriously. Moreover, the Company has already made significant progress in addressing many of the concerns stated in the agreement.

Despite regulatory and macroeconomic headwinds, M&T’s earnings generation capacity remains sound. Reflecting the resiliency of the franchise, the Company did not report a quarterly loss during the downturn. As with most banks, earnings remain pressured by a narrowing net interest margin, tepid loan growth and recently, lower mortgage banking income. For 9M13, earnings available to common shareholders totaled $859 million, up 27% YoY, driven by higher revenues, and lower loan loss provisions. Specifically, for 9M13, higher earnings were driven by an 8.9% increase in total revenues and a 7.7% decline in provisions for loan loss reserves, partially offset by a 0.5% increase in non-interest expense. Historically, M&T’s expense base has been well managed.

M&T’s asset quality continues to track positively with declines in levels of non-accrual loans and net charge-offs (NCOs). The provision for credit losses improved $9 million sequentially to $48 million in 3Q13, and continued to match NCOs. As an annualized percentage of average loans outstanding; NCOs were a low 0.29% in 3Q13, an improvement from 0.35% in 2Q13. Overall, the allowance for credit losses remains sufficient at 1.44% of outstanding loans, especially given current loss rates. DBRS comments that the Company has a sizable CRE concentration, with a significant component of CRE located in New York City. Nonetheless, the portfolio has performed relatively well through the credit cycle.

To strengthen capital and liquidity, in 3Q13 the Company converted approximately $1.0 billion of FHA loans into Ginnie Mae securities and securitized and sold approximately $1.4 billion of indirect auto loans. Meanwhile, reflecting balance sheet management and retained earnings, M&T has increased its Tier 1 common ratio to 9.08% from 7.46% a year ago. Moreover, M&T’s tangible common equity to tangible assets ratio improved to a solid 8.11% from 7.85% sequentially. Lastly, the Company estimated that its ratio of Tier 1 Common Equity to risk-weighted assets under Basel III was approximately 8.75%.

M&T’s solid funding profile is underpinned by a sizable low cost core deposit base along with access to the FHLB and Federal Reserve, if needed. Finally, the Company has a good quality securities portfolio, consisting mostly of government agencies. DBRS notes that M&T recently sold most of its somewhat riskier private label MBS portfolio.

Headquartered in Buffalo, New York, M&T Bank Corporation reported $84 billion in consolidated assets as of September 30, 2013.

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 applicable methodologies include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found can be found at: http://www.dbrs.com/about/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.

[Amended on August 6, 2014, to reflect rating endorsement for use in European Union]

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 14 July 2005
Most Recent Rating Update: 28 August 2012

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