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M&T Is Still a 'Buy,' Despite Setbacks, Says Sterne Agee

NEW YORK ( TheStreet) -- M&T Bank (MTB - Get Report) has quite a bit on its plate, with elevated expenses from a major enhancement of its regulatory compliance and risk-management systems and practices, tied to the long delay of its planned acquisition of Hudson City Bancorp (HCBK), but Sterne Agee analyst Todd Hagerman still rates M&T a "buy," seeing plenty of upside for the shares.

M&T of Buffalo, N.Y., on Friday reported fourth-quarter earnings of $227.4 million, or $1.74 a share, declining from $275.4 million, or $2.11 a share, during the third quarter, and $276.6 million, or $2.16 a share, during the fourth quarter of 2012.  Earnings available to common shareholders for all of 2013 totaled $1.087 billion, or $8.38 a share, increasing from $953.4 million in 2012.

The bank's noninterest expenses rose 7% sequentially and 12% year-over-year to $703.7 million in the fourth quarter.  Excluding non-operating expenses, M&T said its noninterest expense totaled "$693 million in the recent quarter, up from $612 million and $648 million in the fourth quarter of 2012 and the third quarter of 2013, respectively," M&T said in its earnings release.

"The higher noninterest operating expenses in the recent quarter reflect increased costs for professional services largely associated with investments in M&T's infrastructure related to BSA/AML compliance, capital planning and stress testing, risk management, and operational and technology initiatives. Those increases amounted to approximately $40 million when compared to the immediately preceding quarter and $50 million in comparison to the fourth quarter of 2012."

This effort to improve the M&T's Bank Secrecy Act and anti-money laundering compliance sprang from its agreement in August 2012  to acquire Hudson City of Paramus, N.J, in a deal originally valued at about $3.7 billion in cash and stock. The merger was expected to be completed during the second quarter of 2013, but the two companies in April announced that the time needed to gain regulatory approval of the deal would be "extended substantially," because M&T had "learned that the Federal Reserve [had] identified certain regulatory concerns" with M&T's compliance programs.  The companies now expect the merger to be completed by the end of 2014.

The significant delay to the merger, as well as the regulatory overhang has held back M&T's shares, which returned 21% during 2013.  That was a nice gain, but it was also the worst performance among the 24 component stocks of the KBW Bank Index I:BKX, which was up 35% for the year. 

M&T's return on average assets (ROA) for the fourth quarter was 1.22%, down from 1.48% the previous quarter and 1.56% a year earlier.  Its return on average common equity (ROTCE) was 14.12% during the fourth quarter, down from 17.64% in the third quarter and 20.46% in the fourth quarter of 2012.

Hagerman in a client note on Wednesday reiterated his "buy" rating for M&T, while lowering his price target for the shares to $130, raising his 2014 earnings-per-share estimate to $7.90 from $7.86 and lowering his 2015 EPS estimate to $8.85 from $9.00.

"Results fell short as high expenses far surpassed lackluster core revenues," Hagerman wrote, adding that "our sense is any real expense leverage in '14 is largely back-end loaded. However, given the pullback in the shares and MTB's ability to execute in a challenging environment, we continue to favor the risk/reward at current discounted levels."

M&T's shares trade for 12.7 times the consensus 2015 EPS estimate of $8.82 among analysts polled by Thomson Reuters, based on Tuesday's closing price of $111.77.  The consensus 2014 EPS estimate is $7.85.  Based on a quarterly payout of 70 cents, the shares have a dividend yield of 2.51%.

"While MTB's earnings growth will likely slow over the next few quarters as it navigates its inaugural [Federal Reserve review of its annual plan to deploy excess capital through dividends, share buybacks and/or acquisitions] and improves its risk management/compliance programs, we continue to favor the risk/reward at current levels given MTB's consistent and strong earnings track record and perennial conservative outlook, which only speaks to the potential for improved operating leverage in 2014," Hagerman wrote.

Hagerman added that "it's tough to ignore the capitulation in MTB's shares of late, low investor expectations, and the significant underperformance over the last few months," but the analyst remains upbeat for the long-term, because of the bank's long-term track record for achieving double-digit earnings growth and "best-in-class return on tangible common equity over time, including 14.1% in 4Q13."

The following table shows the performance of M&T's stock against the KBW Bank Index  and the S&P 500 since the end of 2011:

MTB Chart data by YCharts


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-- Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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