M&T Bank: Financial Winner

NEW YORK ( TheStreet) -- M&T Bank ( MTB) of Buffalo, N.Y., was the winner among large U.S. banks on Wednesday, with shares rising 1.7% to close at $114.64.

The broad indices ended lower, after the Federal Open Market Committee (FOMC), as expected, made no change to the Federal Reserve's "QE3" stimulus policy. The KBW Bank Index ( I:BKX) was down 0.2% to 64.93, with the 24 index components evenly split between winners and losers.

The Fed has been making monthly net purchases of $45 billion in long-term U.S. Treasury securities and $40 billion in long-term agency mortgage-backed securities since September 2012, in an attempt to hold down long-term interest rates. The FOMC on Wednesday made hardly any changes in its statement on from the September statement.

The Fed's main policy tool is the short-term federal funds rate, which has remained in a target range of zero to 0.25% since late 2008. The FOMC has repeatedly said it expects "this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

The Department of Labor last week said the U.S. unemployment rate in September improved slightly to 7.2% from 7.3% in August. The FOMC on Wednesday said "Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable."

Sterne Agee chief economist Lindsey Piegza had an interesting reaction to the FOMC's statement that the labor market has "shown some improvement: "Really? The unemployment rate has declined from 8.1 to 7.3% in part because the participation rate continues to wane but more importantly, job creation has slowed from +200k to just +140k a month on average."

Piegza in a note to clients following the FOMC statement release wrote that one of the major challenges to the Fed is to make it clear to the market that the eventual end to the "QE3" bond purchases does not mean the central bank will also raise short-term rates.

"Now it is crystal clear, as job creation has slowed further, the Fed will remain on hold until 2014," Piegza wrote.

M&T Bank

Shares of M&T Bank have returned 19% this year, following a 33% return during 2012. The shares trade for 13.6 times the consensus 2014 earnings estimate of $8.45 a share, among analysts polled by Thomson Reuters.

Based on a quarterly payout of 70 cents, the shares have a dividend yield of 2.44%.

M&T in August 2012 agreed to acquire Hudson City Bancorp 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, 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 has identified certain regulatory concerns with M&T's procedures, systems and processes relating to M&T's Bank Secrecy Act and anti-money-laundering compliance program."

The two companies extended the date after which either company could walk away from the deal until January 31, 2014, but also said in April "there can be no assurances that the merger will be completed by that date."

Meanwhile, M&T continues to perform well, with a third-quarter return on average tangible equity (ROTCE) of 18.03%, according to Thomson Reuters Bank Insight. That's a very strong return relative to peers, but it was down from 22.39% the previous quarter and 21.65% a year earlier.

M&T on Oct. 17 reported third-quarter net operating income of $301 million, or $2.16 a share, declining from $361 million or $2.65 a share, during the second quarter and $302 million, or $2.24 a share, during the third quarter of 2012. The sequential decline reflected lower net interest income, as the bank's net interest margin narrowed to 3.61% in the third quarter from 3.71% in the second quarter.

The bank also saw an increase in operating noninterest expense to $648 million in the third quarter from $602 million the previous quarter and $578 million a year earlier.

Jefferies analyst Ken Usdin in a client note on Oct. 24 expressed confidence that M&T's acquisition of Hudson City will eventually be completed, but wrote "we push back our modeled close date to 4/1/14 (from 1/1/14). This modestly weighs on pro forma EPS and we trim estimates further to $8.45 and $9.15 for '14/'15, following downward adjustments to core MTB EPS after soft results last week."

Usdin rates M&T a "hold," with a price target of $113.00.

MTB Chart MTB data by YCharts

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


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

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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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