M&T Bank Corporation (MTB) Earnings Call Transcript & Summary

Welcome to the Wells Fargo Securities Bank and Financial Conference. This is day 2. Our attendance is up threefold over last year, and one benefit of being in this virtual world is we have investors from around the world at our conference. And this very exciting. And we are super pleased to have M&T. We have the CEO, René Jones; and the CFO, Darren King. And so how are you guys doing, René and Darren? Are you surviving this period?

Yes, we, I think, I'll speak for M&T. I think the family is good. We've got about 90% of the folks out of the office, and we're adjusting, most people are not only working but doing kid's math work, which is probably providing the most stress to our workforce. So good.

Great. Well, thank you for joining us. And what I was going to do is I'm going to ask 3 questions that we've been a lot of the banks during this conference. And then we'll open it up to the e-mail questions that if you're with the conference, send me an e-mail. And let's get into it if you're ready.

Sure. I'm ready.

All right. Well, the first question is: COVID, and how is M&T protecting itself on the downside? And how has the playbook changed? And as a reminder to those listening, M&T has been one of the most steady banks for the last 3 decades. René, I know you joined in the early '90s. You went through the bank training program that's been held intact through your tenure. You see every bank had these bank training programs, but you were a lot of the success of M&T, which has been one of the most successful banks around. So you've never seen a scenario like this. So how is M&T protecting itself in the COVID scenario?

Well, yes. Thanks, Mike. I think -- I appreciate you mentioning the long-term perspective, and that's not only my experience, but it's sort of the makeup of M&T. We spent a lot of time on talent in recent years. We're doubling down on that as well because we think it makes the biggest difference. Look, there are some things about this that are different, but there are also some basics of banking that are fundamental through almost any crisis. And the first of that is how -- what you did over the last 5 years, the decisions you made or the decisions you didn't make are what is going to dictate your performance and how you move your way through. I think we'll talk about it more specifically. But I think a lot of our work there, we remain pretty conservative, focused on a select group of clients. And the other thing that's really changed a bit for us over the years from maybe the financial crisis is, we're probably stronger from a PPNR perspective. We now have Wilmington much more fee income-oriented and significantly more ability to absorb stress probably than even going into the last financial crisis. We're being really attentive to our customer base. We always are, but in particular, in times of stress, it's really important that you shift your resources and spend the majority of your time with your clients. Because that's the only way that you can get insight into what they're struggling with and to be able to get to issues that emerge pretty quickly. But as I said, the team is functioning well, I would have never thought that we could have 90% of our workforce working from home and doing -- and keeping the bank running the way we are in a pretty seamless way. So I'll stop there, and, if you have a follow-up.

Well, let me go to the second main question that relates to revenues. And so what are your priorities for revenue? And how have you shifted your resources around, given the changed environment?

Yes. I mean, so one of the first things that we did, in fact, I think a better way to think about it is probably about a year ago, Mike, just under the premise that we had been entering the tenth year of an expansion, we started changing our posture. We started -- we set up inside of our risk structure, we set up a separate weekly meeting. We began to just look at things that might end up moving fast if there was a downturn in the economy. So we started reviewing portfolios, just making sure that we were in good shape. And we actually did that every week kind of leaning up into January, January and February. Once we got into the pandemic mode, we immediately started shifting resources, right? So one of the things that we typically do in an environment of uncertainty around credit is we will shift people who are typically on the line and put them into the workout areas. So it's sort of -- there's a big shift from origination into existing booked and understanding and touching most of your clients. So we've been making that shift, and that's actually been running for quite some time now. So that's in good shape. On the revenue side, it's a fact, we have gone through what I would call a change in posture and a change in mindset. So a lot of the values that we have and the areas that we focus on that produce our revenues have not changed. As I said, relative to the crisis, we have much more trust income and a few other things that have actually -- we are able to gain in terms of servicing and so forth. But the shift in mindset has been the technology, we've always had this -- I would call it, and I think it's not different from most banks, but it was a inside-out perspective. And what I mean by that is we would figure out what it was that the bank needed, and then we would build something and we go offer to our customers. And today, we're in much more of an outside-in posture. So that means that we're talking to our clients, trying to figure out what could improve the quality of their operations or their lives and how do we remove some of the friction. And from there, we begin to think about what are our capabilities within the firm that could help solve that problem. And that has resulted in a huge shift in sort of the way in which we're going about our client base. Think about it this way. When we examined our capabilities, we realized that there's a whole set of skill sets that we just didn't have. Today, we have -- probably 3 years ago, we had 1 user design engineer. Today. We have almost 40. We have hired people with anthropology backgrounds to better understand the ethnography of our customers. And what ends up happening is you round out your capabilities and you're more responsive. And I think part of those capabilities are how you partner with other individuals. And so our focus is really the same, but more client-focused, moving faster, getting to solutions for clients faster, which I think is really relevant in today's world. I think we just went through, in 2 months, a change in customer expectations that probably leaves probably 5 years. So I'll stop there. But that's probably the thing. It's not a big change in the areas that we're in or the types of clients we're serving, but the way in which we're servicing them.

Well, can you elaborate on that last point? In the last 2 months, you've had a change in customer expectations of 5 years. What do you mean by that?

Oh, I mean, if you think about -- the biggest thing that's happened here is the perspective of the customer and what -- the way that they will think about working and what their needs will be coming out of this space. Their preferences are going to move forward. So you can pick almost any traditional banking thing. I'll give you one example. Last year and we wrote about this in our annual letter, we were -- we had a project called Mission Maryland, which was really focused on focusing on empowering those people who were closest to the customer. And we came up with this idea that, you know what, we probably needed to do much more around appointment setting to give more specific service to those who needed it. So we ran a pilot, 90% of the people who ended up setting up an appointment actually can't follow through on the appointment. So we were testing and learning around that, but when the crisis hit, we had to do that in order to be able to keep our services up. So we went from a small pilot in Maryland, partnered with a Fintech firm and actually are now using appointment setting across the entire network. And will that go back to all the way where it was? Probably never, right? Some customers have -- will like this, and some customers are for the appointment setting. And so how do we begin to change our posture to make that a more sustainable infrastructure. There are millions of examples. But I think...

So that's a good one. And then my third main question relates to expenses. In the revenue environment, it's tougher, so what are some of the key expense levers? And how can this period accelerate structural change? You just gave one example there. But maybe there's some others.

Yes. I think there's a lot of -- if you think long term, I think there's a lot of opportunity structurally. And if you think back to my example of outside-in versus inside-out, the other thing that we would typically do is we would offer lots of products and services and we would guess that what the client would need. But most importantly, we didn't really remove a lot that weren't working all that well from the system and replace them with new things. So I think that as we begin to think about the new ways of working, more digital, I mentioned appointment setting, those types of things, what will end up happening is that we'll have opportunity to figure out how to reduce old things that we used to do. I think one of the most important things as a regional bank and for regional banks to be relevant in the future, is to double down on the idea that your operating model has to be simplistic. It's the one advantage for large national banks. And to the extent that you're not overly complex, your ability to partner with innovative folks, the creative class, we talk about them as Fintechs, but there's more than that, to be able to partner with those individuals and use their services is really going to be based on how simplistic your model is. So I think there's going to be lots of opportunity to do that. I can give a couple of examples. Think about this, we stood up going into this, we had our teams thinking about how we were going to take our workforce to work from home. And one of the things that came up was someone just raised their hand and said, none of this stuff is going to work without e-notification -- notarization. Yes. And so we built it, we put it in place. We didn't have it before. About a week ago, I got a note from a prominent member of a bank, the banking association -- one of the banking associations, national banking association. And he told the story of how he was in Washington, D.C., and he went to every single bank that he could find, and he just could not get his documents notarized. And somehow he stumbled upon M&T, I'm not sure why he came to us last, and our individuals in the branches in about 30 minutes for the first time, did e-notification for him and got the entire thing done. And so this is a span of idea to reality in 6 weeks. So your speed and your ability to keep things simple is going to be really important to be able to lower your expense base and to do things in an efficient way.

Wow, that's a good example. Let's take some e-mail questions here, so we'll go to the e-mail. And several questions here about your exposure to commercial real estate in New York City. I know I've been out of Hudson Yards now for 2.5 months, and there's questions about other firms and whether they'll ever come back. And so just how do you size it? How do you think about that?

Yes, sure. Mike, if you don't mind, I just -- I'm going to just start in a different place and get to real estate. I want to talk about what we don't have. Because I think that's important. So you probably know this. We have minimal exposure to the -- to most disruptive sectors, such as energy exploration and production; airlines; cruise lines; or shopping mall-based retail. If you look at our C&I book, we have about $1.6 billion in retail, of which, more than 1/2 is convenience stores, auto parts, gas stations, which really have not been subject to the shutdown. And then the other 1/2 is grocery stores and home improvements, which are also less impacted. The restaurant space, which everybody is seeing is really difficult, we have less than $1 billion there, mostly in franchises that are fast food and walk-up as opposed to sit down and dining. So we're fortunate to sort of have that position. If you look at the real estate space, I think there's a few things that are really important here. I think, overall, in real estate today, the structures are much more sound than when we went into the financial crisis. So going into the financial crisis, it would not be unusual to see properties that are financed with about 75%, maybe even 80% debt, a 10% equity piece and then a mezzanine piece for filling the rest. That industry-wide is significantly different today. There's much, much more equity in the structure of the deals. And in our particular case, as I'll share with you is that we may be on the extreme of that. Second thing that's going to matter is client selection, who your clients are, how long they've been in the business, how long they know the market is really, we believe, going to be a differentiator. So if you think about our portfolio, what I'd say is if you just sort of run down the portfolio from things that are least impacted to most impacted, like industrial -- in the industrial space, which is really a small piece of our portfolio. To date, some of those individuals are paying 7% deferrals. In the multifamily space, 90% of rents are still being collected. And the deferrals in our New York City portfolio, for example, are just -- these are all holding [indiscernible] at least to date. If you get to office, which is getting a little bit more of stress there, right now, rents are somewhere in the -- 75% of rents are being collected. We've got in our New York City portfolio, about 13% on deferral. And as you start to get into the places that are most affected, hospitality pops up. Okay. So if you think of hospitality, hospitality is about 10% of our total real estate portfolio. 80% are in deferral. So this would be the space in which we're most focused in looking at running scenarios and actually working with clients. What helps us, it goes back to what I said earlier, is the structure. So our structure is in that portfolio, it is about 54% loan to value. We haven't talked about it, but it's significantly less in New York City, right? And that's principally because we're banking the same individuals that we pretty much started banking in the late '80s or early '90s, and those were the survivors. So the multigenerational families that are there in New York City, who have several times sort of positioned themselves for the inevitable downturn in the market that will occur so that they can be productive on the other side. So as I think about that portfolio, we're doing what I'm about to tell you for almost every portfolio. But because deferrals are -- because when you defer, you're not getting lots of feedback, we've shifted to an approach that requires us to go to every single client, ask them to build a forecast. We did this, this past month. Every month, on that [indiscernible] with where they are against those forecasts. And when we run our scenarios in the hospitality space, what we basically assume is that there'll be no -- even though there is revenue, we'll assume that there's no revenue through the rest of this year, and then maybe we look through and say, at some point, late in 2021, it gets up to 60 -- 50% and then eventually, it maxes out in 2022 at about 65% of total revenues. And you can see that under those scenarios, we fare pretty well because we've got so much equity in the transactions. I think that sort of the thing that really differentiates us. If someone -- your client has 10% equity in the deal or even 15% of equity in the deal, their behavior is just totally different than if they have 50%. And that also affects real estate prices as we move forward. We also have -- in retail, retail is really, as everybody knows, is relatively tough. In our New York City portfolio, which is relatively small compared to the total of our retail, we're mostly in the mixed-use building. So think of Manhattan, think of a building with retail on the ground floor, but either office or multifamily on top. So there's multiple sources of revenue streams. We're watching that really closely. It will be interesting to see how they come back. Tenants that right now that have like less than 2 years left on their lease are -- there's no commitment. It's -- the sense that we get from our clients is that it will be changed dramatically, but that things will be fine, that things will come back and there'll be uses for those properties. So I'll stop there and maybe I'll let you ask some more detailed questions. Mike?

Sorry, I had on mute. René, you gave a presentation at the Boston Bank Conference several years ago. And you talked about how M&T deploys the most amount of capital at most advantageous times. Do you recall that presentation?

I do. I do. I do.

I thought that was just awesome. So this would be one of those times. So are you looking to put more capital to work through acquisitions or other means?

I think it's a great question. And the answer is always yes. The timing of it matters. This is a point where if you've done your homework and you get to your problems that you may have very quickly, you're [indiscernible] wherewithal. And what's important is wherewithal relative to others. So we've talked about long about our capital generation rates. I shared last year that basically after dividends, we had to put to work 13% because we can [indiscernible] 13% growth without affecting our capital base. You saw in the first quarter, we fared pretty well. So that capital generation rate was down to 4%. It basically means that we can grow our portfolio and use it for opportunities in a way that maybe weaker institutions. But that takes time. So you'll spend your time working on your portfolio in detail. Most likely, you're going to learn some things. You're going to learn some things that are going to make you very knowledgeable about taking advantage of opportunities. So in the last cycle, if you think about it, we were working on real estate. We were heavily into the book. We understood the book. Really, that's the only reason why we could have bought Wilmington Trust. We had no experience really in the wealth management space, not much experience in the trust space. So for us to make that decision to buy Wilmington Trust for those businesses alone, didn't make much sense. We wouldn't have had an advantage. But we knew real estate really well, we could solve their problems in real estate pretty easily. The same was true with -- we had a nasty little $1.4 billion all-day mortgage portfolio. The best thing that came out of that after losing about $200 million was that we became a very, very adept servicer of mortgages. And we decided to stay into that business because we were clean in the servicing business, and we actually had built this capability to work that out. So oftentimes, you can't really predict where the opportunity is going to come, but they'll be there. And as long as you have strong capital generation, you can take advantage of those opportunities. So we'll be looking at it. But I think at the end of the day, things probably don't emerge until we get a clear insight into the breadth of the problems caused by COVID.

Okay. Another e-mail question. Most of the questions are on credit here. And at what point -- just read it to you directly. What's the earliest quarter M&T could see negative risk rating migration related to COVID? And also of your deferred customers, would M&T downgrade customers at risk before the end of the deferral period?

Oh, it's a great question. It's a great question. Later on, you want to tell me who asked this question because -- so this is really fundamental. Because of deferrals, the industry loses sight of really what's happening on the ground. You're missing -- someone missed a payment, there's no payments being missed, so you lose sight of it. And then for a minute. We're all looking at CECL with the very macro models based on Moody's and other individuals and scenarios that are coming out. But what really, really matters is what's happening on the ground. And so what we've done, as I mentioned, we've got this process where all of our RMs are asking all of our clients for forecast. And then we will revisit with them how they're doing every single month all for the sole purpose of making sure that we have lots of speed into our grading structure. So in this environment, the thing that you have that's going to be the most telling to you is your grade migration. And my sense is that we won't wait until 6 months passes, right, because you could have 6 months of deferment on a commercial customer [ you could have ] a year on mortgage. We won't wait. We will really focus in on identifying problems early and reflecting that in our grade structure. And that's helpful, obviously, for your allowance and keeping your allowance in the right place. But it's also helpful in identifying problems early. A big part of the differentiator for us has been the fact that we get to our problems I don't want to say earlier than everybody else, but we get to them very early and we identify them early, which gives you the biggest ability to work things out, which is probably worth saying that people have talked a little bit about this idea that, well, M&T's allowance is only 40% of their own company-run stress tests. The median of the regional banks is 40%, 39%, 40%. So we're not different there. But one of the issues for us is that our bank-run stress tests are about 2.5x more stressful than our performance in the great financial crisis. On average, a regional bank is about the same. There's not a difference. But for us, our outperformance really wasn't able to be reflected in those models. Do you step back, Mike, and you look at our relative loss rate, and I did it going back to 20 years, where 100 means that given your mix, you should have industry-standard losses. We are 59% over 20 years, which covers 9/11, it covers the great financial crisis. Not only that, there is not a single year over the 20 years where we have a relative loss rate of 100. And that is all about the process underneath and how we move fast to identify problems and -- and as I said before, the client selection. So it's a great question. I would suggest that we will see grade migration out of the gate, and we will continue to see it over time. And that -- you should look at that as not a problem, but as a healthy thing.

Great. Well, we're almost out of time. So I'm going to summarize what I think I heard you say and allow you to kind of lean into some parts of this. So I think from a philosophical standpoint, you're talking about a mindset change from inside-out to outside-in, and that's helped you to kind of reimagine banking with appointments and more digital and taking these last 2 months and really reflecting 5 years' worth of advancement. So I think that's quite noteworthy. And then a lot of the talk has been, what I would call, of your proactive defense, like you said, all RMs are asking all clients for forecast. You talked about being in the trenches with the clients. You did talk about some extra protection with more trust income versus the GFC. And then as far as offense, I thought it was important when you said the wherewithal versus others, right, it's relative strength, but it's a little early yet for any kind of acquisitions or anything of that sort. So what would you like to stress before everybody leaves this call? Or -- and is that a fair summary?

Yes, it's a great, it's a great summary, Mike. I appreciate it. There's so much more I can talk about, a couple things I'm really proud about. I'm really proud about that relative to the past, we also have these businesses that no one really ever asked us about around -- in the Wilmington space where we essentially are the constant provider of choice around bankruptcies. So what people don't typically ask us is that things like we're the bankruptcy trustee for American Airlines, Toys"R"Us, Neiman Marcus, RadioShack, which are all countercyclical. And at some point, get me back on and let's talk about some of those businesses. And then the other thing I would like to just maybe end with is an example of how much we've moved in terms of our agility, if I have 2 seconds. And that was the performance in our Payroll Protection Program. We -- the week coming into the April 6 opening, we decided to jump in and build a minimal viable product around a system to do PPP. So we reached out to a Fintech firm. In 72 hours, we built the system. My guys told me on Thursday, that we weren't going to open up on Friday. I wasn't feeling good. I almost had a heart attack, but I decided to leave them alone. And what they did is they took the system Friday, Saturday and Sunday, and they tested it with clients. They put a few clients in, and they worked out the kinks, adjusted it, launched on Monday and did 9,000 applications in 90 minutes. And then they went through the process again and made tweaks based on client suggestions or complaints and they modified it all the way through that week. At the same time, our teams were on the ground, helping people with their issues. And one example of them, helping with the issue is that our clients started saying, well, we're not getting a notice, you told us we've been funded or at least been accepted a number for the SBA. And so one of -- one example is our -- one of our RMs said, "Hey, have you ever gotten a note from the SBA before? And they said, "No". And so what they said is, "We'll check your spam folder." And lo and behold, host of all of our clients had received notification, but it was trapped in their spam folder. And so we passed that alarm. And then in the end, we weren't getting things in. So we built a channel through the API [indiscernible] 6% of total loans, which were 27,711 loans. So years ago, we would never have been able to move that quickly. We would never have been able to partner with an outside partner that fast. And I think it's just a great example of the resiliency of our firm and sort of what we've gained over the last 3 or 4 years. So I really appreciate your time, Mike. Thanks so much for letting me on and look forward to doing it again sometime.

That's great. René Jones, CEO; Darren King, CFO of M&T, thank you for joining us at our Wells Fargo Securities Virtual FINs Conference. Have a great rest of the day. And thanks, the investors, for joining.

Thanks, Mike.

Thanks, Mike.