DBRS: M&T’s 2Q Sound: Non-Core Items, Seasonality; B/S Solid

Summary:
• The Company reported 2Q15 earnings to common shareholders of $263.5 million, up 20.4% from $218.8 million for 1Q15, and up 1.1% from 2Q14.
• The quarter’s results reflected two non-core items including a $45 million pre-tax gain on the sale of M&T’s trade processing business within the retirement services division of its Institutional Client Services business, and $40 million of tax deductible cash contributions to the M&T Charitable Foundation.
• DBRS rates M&T Bank Corporation Issuer & Senior debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers M&T Bank Corporation’s (M&T or the Company) 2Q15 results as sound, reflecting good loan growth and solid balance sheet fundamentals. During the quarter, spread income increased 3.6% sequentially, spurred by higher levels of average loans and average securities. Average loan growth was broad-based led by higher levels of commercial real estate loans and commercial and industrial loans. Meanwhile, M&T’s fee income was up substantially, due to a gain on the sale of its trade processing business within the retirement services division of its Institutional Client Services business. Excluding the $45 million gain, adjusted fee income increased moderately quarter-on-quarter (QoQ), driven by higher commercial lending syndication fees, an increase in mortgage banking revenues, and higher deposit service charges which were up from a seasonally lower 1Q15.

The Company’s expense base remains well-managed, despite the costs associated with BSA/AML, which should contract modestly going forward. Excluding the contribution to the M&T Charitable Foundation, the Company’s non-interest expense was down sequentially, primarily due to seasonally higher 1Q15 levels of salaries and employee benefits, including stock-based compensation.

Overall, balance sheet fundamentals remain solid. Asset quality remains sound reflecting very low net charge-offs and modestly higher non-performing loans. Meanwhile, the Company’s capital position is sound, with an estimated transitional Common Equity Tier 1 Ratio of 9.92%, which was up from the prior quarter.

In August 2012, M&T announced its intent to acquire Hudson City. The transaction has been delayed due to concerns with BSA/AML at M&T, and the date after which either party may terminate the merger agreement has been extended once again to October 31, 2015. 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. Indeed, the Company believes it has made significant progress in addressing the concerns stated in the agreement.

DBRS rates M&T Bank Corporation’s Issuer & Senior debt at A (low) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.