Morningstar DBRS Downgrades M&T Bank Corporation’s Long-Term Issuer Rating to “A”; Trend Now Stable

DBRS, Inc. (Morningstar DBRS) downgraded the credit ratings of M&T Bank Corporation (M&T or the Company), including the Company’s Long-Term Issuer Rating to A from A (high). At the same time, Morningstar DBRS downgraded the credit ratings of its primary banking subsidiary, Manufacturers & Traders Trust Company (the Bank) including its Long-Term Issuer Rating to A (high) from AA (low). Following the downgrades of all long-term credit ratings, the trend for all credit ratings is now Stable. The Intrinsic Assessment (IA) for the Bank is A (high), while its Support Assessment remains SA1 The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings downgrade reflects M&T’s weakening asset quality metrics, which has led to the current elevated levels of nonperforming loans (NPLs) and criticized loans. While the Company’s loan portfolio, including its greater than peer Commercial Real Estate (CRE) concentration, has historically been very well managed, the expectations of a higher for longer interest rate environment may add incremental asset quality pressure.

The credit ratings and Stable trends also recognize M&T’s strong banking franchise and long track record of posting top-tier peer financial performance with low earnings volatility. Additionally, the credit ratings consider the Company’s consistent and disciplined loan underwriting, which has underpinned its historically low levels of net charge-offs (NCOs). M&T’s improved capital levels and buffers to regulatory minimums are also factored into the Company’s credit ratings.

CREDIT RATING DRIVERS
If M&T successfully diversifies its loan portfolio, reducing the level of CRE loans while restoring asset quality metrics and maintaining strong earnings and capital levels, the credit ratings would be upgraded.

A further deterioration in asset quality, evidenced by NPLs and criticized loans remaining at elevated levels and NCOs increasing significantly beyond current expectations, would result in a credit ratings downgrade. Additionally, prolonged negative operating leverage, or a significant reduction in capital levels would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong / Good
M&T maintains a deeply entrenched commercial and retail banking franchise throughout the Northeast and Mid-Atlantic regions, underpinned by a large, relatively stable and low-cost deposit funding base. M&T also garners significant levels of non-interest income through a variety of business lines. The Company is, as of March 31, 2024, the 18th largest U.S. commercial bank, with $215 billion in total assets and leading market shares across its footprint.

Earnings Combined Building Block (BB) Assessment: Strong
M&T’s earnings power remains strong, supported by a diverse set of businesses, which generate a solid level of fee income (26% of total revenue in 2023). The Company’s earnings power is supported by its strong net interest margin (NIM) and good efficiency levels. We note that M&T’s NIM is higher than most peers due to its loan portfolio being heavily weighted towards C&I and CRE loans, along with its comparatively high amount of non-interest bearing deposits.

Risk Combined Building Block (BB) Assessment: Good / Moderate
M&T’s loan portfolio is diversified, but is overweight in commercial real estate (24% of total loans). The Company has been reducing this exposure with the expectation that it will continue to reduce the level of CRE loans in the portfolio. Additionally, M&T has a long track record of conservative loan underwriting, evidenced by low, through the cycle, net charge offs. NCO levels, while increasing, continue to be manageable, representing 0.33% of average loans in 2023. The Company is expecting NCOs of approximately 40 basis points of average loans for FY2024. At the end of 1Q24, criticized C&I and CRE loans were up 22% YoY to $12.9 billion, representing an elevated 14.3% of total loans.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
M&T’s funding and liquidity is sound, underpinned by a sizable deposit base, substantial levels of on balance sheet liquidity and ready access to additional liquidity. Deposit account sizes are granular with about 36% representing uninsured or non-collateralized deposits, with liquidity sources covering 135% of these balances, as of March 31, 2024.

Capitalization Combined Building Block (BB) Assessment: Strong / Good
We view the Company’s capitalization as solid and improving, especially considering its track record of maintaining strong earnings and manageable credit losses. M&T had a CET1 ratio of 11.1% as of March 31, 2024, up nearly 100 basis points from the prior year period. Management has prudently increased capital levels, given the uncertain environment, potential changes to capital rules, as well as elevated levels of criticized assets. With a stress capital buffer (SCB) of 4.0% currently, M&T’s regulatory minimum CET1 ratio is 8.5%, which is higher compared to most regional bank peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/432728.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (April 15, 2024). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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