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Big Banks: Housing and Earnings Winners

M&T Bank

Shares of M&T Bank (MTB - Get Report) of Buffalo, N.Y., rose 6% to close at $103.07, after the company reported third-quarter net income available to common shareholders of $273.9 million, or $2.18 a share, blowing past the consensus EPS estimate of $1.85, and increasing from $1.71 in the second quarter, and $1.32 during the third quarter of 2011.

Tax-adjusted net interest income totaled $669 million in the third quarter, increasing from $655 million the previous quarter, and $616.7 million a year earlier. The company bucked the industry trend, with its net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- widening to 3.77% during the third quarter, from 3.74% in the second quarter, and 3.68% during September of last year.

M&T's noninterest income increased to $445.7 million during the third quarter, from $391.7 million the previous quarter and $368.4 million a year earlier, with a large increase in mortgage revenue and lower impairment charges. The year-over-year improvement was partially offset by a decline in service charges on deposits accounts, with the Federal Reserve making the Durbin Amendment's cap on debit card interchange fees effective during the fourth quarter of 2011. The quarter-over-quarter improvement was partially offset by a decline trust income.

With the wave of home refinancing continuing, M&T reported third-quarter mortgage banking revenue of $106.8 million, increasing from $69.5 million the previous quarter, and $38.1 million a year earlier.

M&T's earnings improvement also reflected a significant reduction in expenses, "predominantly due to the integration of the operations obtained in the May 2011 acquisition of Wilmington Trust Corporation." Third-quarter noninterest expenses totaled $616.0 million, declining from $627.4 million during the second quarter, and $662.0 million, during the third quarter of 2011.

The company's third-quarter return on average assets was 1.45% and its return on average common equity was 12.40%.

The company in August agreed to acquire Hudson City Bancorp (HCBK) of Paramus, N.J., for about $3.7 billion in stock and cash. The deal valued Hudson City at $7.22 a share, or 80% of its reported June 30 tangible book value of $9.08.

Jefferies analyst Ken Usdin rates M&T Bank a "Hold, " with a $96 price target, and said that the company's third quarter was "solid across the board, " as "most core drivers were better-than-expected.

"Overall, it's tough to poke any holes in 3Q results," Usdin said, "as core EPS easily beat estimates on [a] solid net interest income (NII) trajectory, higher mortgage banking fees, lower expenses, and improved credit quality."

With a Tier 1 common equity ratio of 7.47%, Usdin said that "MTB's capital ratios remain among the lowest in the group, but capital accretion from the HCBK merger and relatively better profitability should help close the gap over time," and said he expected the Hudson City acquisition to "add 30bp-40bp to regulatory ratios at close (expected in 2Q13)."

M&T's shares have now returned 38% year-to-date, following a 9% decline during 2011. The shares trade for 13 times the consensus 2013 EPS estimate of $7.80.

Based on a quarterly payout of 70 cents, M&T's shares have a dividend yield of 2.72%, that is very well supported by earnings.

MTB Chart MTB data by YCharts

Interested in more on M&T Bank? See TheStreet Ratings' report card for this stock.
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