New Delay for M&T, Hudson City Deal Should Be Comfort to Investors (Update 1)

Updated from 8:13 a.m. ET with midday market action and comment from BMO Capital Markets analyst Peter Winter.

NEW YORK (TheStreet) -- Another long delay to the expected closing of M&T Bank's (MTB) acquisition of Hudson City Bancorp (HCBK) may initially upset investors, but the latest extension of the walk-away date actually makes the completion of the deal more likely. 

The companies late on Tuesday said "additional time will be required" to obtain regulatory approval of the merger, as M&T continues to improve its Bank Secrecy Act compliance systems and its anti-money-laundering compliance program, as required by the Federal Reserve.  The banks extended for 11 months "the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed" to Dec. 31, 2014 from Jan. 31, 2014.

M&T of Buffalo, N.Y., in August 2012 agreed 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 has identified certain regulatory concerns" with M&T's compliance programs.

As they did in April, the two companies on Tuesday said "there can be no assurances that regulatory approval will be obtained or that the merger will be completed" by the new walkaway date of Dec. 31, 2014.

M&T CFO Rene Jones said in the joint press release that "We continue to believe strongly that a merger with Hudson City is beneficial to both institutions, their shareholders and the communities we serve. We could not have asked for a better partner than Hudson City as we continue to work towards a successful outcome."

Jefferies analyst Ken Usdin in a client note late Tuesday wrote that the latest extension "should provide ample time for MTB to progress toward compliance with bank secrecy and anti-money laundering projects to a level that will satisfy the Fed enough to approve the merger."

But the delay did cause Usdin to lower his 2014 earnings estimate for M&T to $7.85 a share from $8.45, "after removing $0.60 of accretion."

"Our 2015 EPS estimate actually moves up to $9.30 from $9.15 on higher net interest income, as the additional time to close will result in a larger-than-planned HCBK loan book," Usdin added.

The analyst also raised his price target for M&T's stock to $116 from $113, "on the '15 revision," but reiterated his "hold" rating for M&T.

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's down from 22.39% the previous quarter and 21.65% a year earlier.

But Rafferty Capital Markets analyst Richard Bove told Dan Freed last week that he M&T was his least favorite stock among the banks he covers. 

""It's in the midst of a major major restructuring of every aspect of its company because it grew too fast and didn't build the infrastructure necessary to keep up with that growth," Bove said, adding that he didn't think the Hudson City deal would ultimately be completed.

M&T 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, reflecting its compliance outlay.

M&T's shares have returned 18% this year through Tuesday's close at $113.73.  The shares trade for 2.3 times tangible book value, according to Thomson Reuters Bank insight, for 13.7 time the consensus 2014 EPS estimate of $8.32, and for 12.2 times the consensus 2015 EPS estimate of $9.33.

BMO Capital Markets analyst Peter Winter in a client note late Tuesday wrote that the original extension of the walkaway date for the M&T acquisition of Hudson City was "arbitrary," but that the new deadline of Dec. 31, 2014 "is based on more informed discussions with the Fed."

M&T has already added 200 staff members to beef up its compliance programs as required by the Federal Reserve, however, "more investments need to be made and the Fed needs time to test the upgrades in the BSA and AML systems; thus, the Fed needs additional time to act on the merger application," according to Winter.

BMO Capital Markets has a "market perform" rating on M&T, and Winter on Tuesday lowered his price target for the shares to $115 from $119, "which is based off 14.0x our 2015 core EPS estimate, discounted back 1 year at 10%. We assign MTB a higher target multiple than its peers, owing to its above-average profitability and low-risk profile," Winter wrote.

Winter's price target and earnings estimates assume M&T will complete the acquisition of Hudson City Bancorp by the end of 2014.

The following chart shows the underperformance of M&T and Hudson City this year against the KBW Bank Index I:BKX:

MTB Chart 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 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.