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

Good morning. I'm Jason Goldberg, and I cover the U.S. large-cap banks here at Barclays. Welcome to day 3 of our 18th Annual Global Financial Services Conference. Today is a little bit different from the prior 3 days. We'll have a couple of tracks of bank and other financial institution presentations. We have another track purely on panels on topics such as M&A, the regulatory environment, the political landscape, bank's balance sheet, you have a panel deposits. And then a whole lot of other issues that investors have been asking about. And we also have a full day fintech track, which includes 24 both public and private companies that are trying to disrupt the financial services industry that we thought you might be interested in. Kicking off day 3, from the banking side of it, very pleased to have M&T Bank. Before I turn it over to M&T, just a couple of housekeeping reminders. [Operator Instructions] So without further ado, very pleased to have from M&T, Chairman and CEO, René Jones; Chief Financial Officer, Darren King; and Head of Investor Relations, Don MacLeod. Good morning, gentlemen.

Good morning, Jason.

Maybe the best place to start is just big picture. You've announced a number of initiatives recently that are different from what we've seen from M&G historically, and we'll get to those. Don't worry. But first, maybe discuss what elements of M&T's traditional community banking model have remained in place.

Yes. I mean the majority of our focus on how we go to markets and how we serve the community are unchanged. I mean our purpose has always been to make a difference in the quality of people's lives and the quality of our communities. And that's sort of one of the ways that sort of gets you to our financial results, which are that we like to go into places where we can make a big difference. We like to have a lot of local share. We like to be immersed in the activities, whether they be business or civic and by doing that, it's allowed us to sort of build a bank with a great purpose, but that also has turned into solid financial results. So that purpose and the way we think about the bank local scale has not changed. But I think what we're essentially doing is modernizing the way we actually approach that mission by leaning in deeper to the understanding what our customers and our communities' needs are and producing services that respond to them in a way that, I would say, is maybe a couple of steps more responsive than we've been done in the past. So most of the activities that we've talked about, whether they be investments or whether they be things like Nota, they're all centered around renewing and doubling down on that community, local based focus.

That's fair. I guess related to that, shortly after your appointment, you noted M&T needed to do more on the technology front to stay competitive. So I thought we could dig into that given that get some investor attention. You previously mentioned your intention to hire over 1,000 technologists over the next few years. How far down the track are you? And what remains to be accomplished?

Yes. I think -- so that's all on track. I mean, if I step back a little bit, I think maybe the way to think about it, Jason, is if you think of what we've been able to do, you saw the increased investment in technology and the increased investment in staffing, all around, which I would call either technologists or innovation workers. So in just the tech space, we hired 300 people in the first year, which is 2 years ago. This past year, we're doing about the same 300. So we're on a pace to do a total of about 1,500, which nets out to 1,000 additional. And those come in all kinds of skill sets. They come in technologists. They come in, user design engineers. I've talked about the fact that just when we began the journey, when I started, I think we had 1 or 2 user design engineers. Now we have a group of 40. So anywhere you go, Wilmington Trust, if you're designing products and services for the customer, you use that group and you think about how we look and feel and whether it's meeting customer needs. So there -- so we're well on our way in that space. And I would say from an investment perspective, I don't want to say it's behind us, but in terms of rate rising expenses associated with it, that is behind us. And when you step back and think about it, we've made all these investments. We produced 19% return on equity over the past 2 years. We've had above-average earnings per share growth. And in fact, I talked about it internally a lot, when we look at the top 20 banks, it's only ourselves, JPMorgan and Silicon Valley Bank that have both had above-average earnings per share growth above-average ROE in 1 year, 2 years compounded and 3 years compounded. Yet, we were able to make those investments. And when you come on the other side of it, if you think about where we have in the commercial space, we have an entirely new commercial loan system that's end-to-end. From prospect all the way through to booking and to management of the systems all the way into credit. We added Worldpay, a new merchant services platform, really important. We have an entirely new treasury management services platform. If you go to the retail side, I won't list them all, but it's very similar. One example would be the infrastructure around our website is such that it has now the capability for both Darren and I to get on the website from our home, but because his profile is different, he might see different things in the pictures on the website, moving towards personalization. So I really feel like the last 2.5 years, almost 3 years have allowed us to invest at the same time as produce returns. And that has really set us up really well for where we're going next.

That's interesting. I've been reading a lot about this tech hub. You've been creating a downtown Buffalo assuming that these technologies be housed there and maybe talk to the time frame for that, and has COVID-19 is also distancing delay that at all?

Yes. Our original hope is -- so we've gone through the tech hub is built and just about ready to house people. Our original plan was that we'd probably be moving the first people in in June before COVID. And now I think we'll be moving -- we will start to move some people in as we get into the fall, but most of it will be very similar to what happens with the rest of our workforce. Interestingly enough, when you think about the tech hub, Jason, what I want you to think about is, yes, it houses M&T's technologists and the sort of creative groups of people who are building things for customers. But what we decided was that one of the biggest problems is to continue to hire and maintain that talent. So we built the tech hub for Buffalo. We built the tech hub to make sure that there was a place for technologists and the creative groups to solve health care problems to solve all kinds of problems. So that, for example, the tower is already occupied by 43 North, which is Buffalo start-up community, investing in a number of places. You may know ACV Auctions, which is a unicorn that was started 5 years out of that space. We've got a host of other technology companies, one that moved from Silicon Valley to come into Buffalo and set up a open source design CRM system. So part of the issue is while we're building the tech hub for M&T and for our new way of working, we're actually building it as a community asset, which is actually -- that's the part that's really a differentiator because you've got to be able to get talent that wants to work in the community.

I guess you mentioned talent. I think one of the things that kind of differentiated M&T over the years has been your formal management development program. I think you went through that, Rich Gold, went through that. I think a lot of other banks have kind of downsized or eliminated those types of programs. Maybe just talk to how you're managing the acquisition and retention of key talent and capabilities today?

Yes. I mean there's a suite of things that we're doing. But there's -- when you start thinking about employee engagement, you start thinking about empowerment. That's a big part of it. How do you bring in talent is one thing, but how do you set it up in a way that lets them run and use their skill set. So that's been something that we're very heavily focused on. But I think the signature thing is that if you think of what we've been able to do with our training programs, and it's not that we have them, it's the consistency at which we have and deploy the talent over many years. A year ago, I think, I can't remember '18 or '19 we added -- I think '18, we added the tech development program. And so that was the first year we hired 53 students out of undergrad to come into that program. And then we did 70 the second year, this year. But when you think about that, how do we do that? Well, if you're a member of Mike Wisler, our CIO's tech team, one of the requirements is that you have to be like an ombudsman at a university. So our guys are actually out there in the university, teaching the classes and sort of influencing the type of talent that we need. And that has allowed us to run those programs. So when you look in the -- 2 years ago, our total talent programs, MDP, EA and Tech Development, were 225 individuals. And I think this year, we're more like 170 or 175. We scaled it back a little bit, but we didn't scale back the tech component of it. So our view is that if we do that year in and year out, very much like Bob did, and eventually, there'll be a Jones or Rich Gold around it and will be running the firm in years to come.

Interesting. I guess there's been some confusion out there with your pending contract with LPL Financial in the brokerage business. Can you maybe just talk to what that is and kind of what you're expecting?

Yes. I think there was so much excitement about it that some folks got carried away with a description. But look, so Jason, the way we're approaching things today is because we're starting with the customer, looking at what the customer needs are. As we identify what those needs are, the second step is to come back into the house and understand what our capabilities are. And that might mean we have capabilities, we might build them. We might buy or lease them in a new way. So we start to understand that, that's how you begin to get into partnerships. LPL is one of our first sort of forays in not the Wilmington Trust, but into the consumer segment, which we used to call M&T Securities. It's all run by the Wilmington management team. And basically, what they decided was that it would be too hard for us to get the customer -- build the customer experience that we needed to give -- to give our mass affluent and our affluent consumers. The investing and money movement capabilities that they needed. So we wanted that almost a consumer play in that particular place. But instantaneously, what we get is the ability for our customers to self-serve. We get an ease of look and feel. We lower the risk because we're not the broker of record, and we actually lower the cost to serve because we're using their platform, so there's FTE savings that we don't need anymore. So I think more importantly, it's a really good way to think about how we're thinking about meeting the needs of our customers. It won't always be built by M&T, but we will give them the best-in-class experience.

Helpful. Historically, economic downturns have provided M&T opportunities to kind of speed up this growth trajectory by taking share or even acquiring kind of more challenged competitors usually at attractive valuations. What are your thoughts on potential growth opportunities in the current climate?

Yes. I don't -- it's funny. Maybe different than even 6 months ago. I don't really see any impediments to M&A. Think about the idea of entering a partnership today versus a year ago. People might -- some people might say it's more risky. I think you see -- you see a lot more today than you would have seen a year ago. So I think there's more transparency. I think the bank valuations are right. And I think because of the speed of -- and the advancement of things that are happening in the industry, there's more partnerships are needed. And so I don't see impediment to whole bank acquisitions. I -- similarly, I think as we move down this partnership track, we're going to find other ways to partner that might look like M&A, but might not be traditional M&A.

Can you expand on that?

Yes, maybe not whole bank. So if we think about the asset that we have in our Wilmington Trust, for example, I mean, what was the last time you saw an advertisement for Wilmington? I mean we have a brand recognition that's just below Northern Trust. So our ability to think about how we partner with people in individual communities try to use that asset, might be a nontraditional way of how we might grow and add services there.

Helpful. And I guess, absent kind of meaningful growth opportunities, how are you thinking about deploying excess capital when do you think you could start a share repurchase? Or are you going to let capital ratios grow?

You can't see it, but there's -- chills just went up my spine with the last comment. Look, I think we've got to continue to look for ways to utilize the capital or to give it back over time. There are periods where it's not prudent to do that. So you can't necessarily do that today. But there's a discipline that comes with managing your capital ratios tight. It makes you think about how you're using it, it makes you not stretch on credit and risk in a way. So my sense is that I think in the near term, you'd probably see capital ratios grow, but that's not an intention of ours to have above our target rates for capital.

Got it. And then M&T's New York City portfolio has garnered a lot of attention from investors, just given this COVID-19 pandemic. Maybe just update on what you're seeing, hearing from your New York City customer base.

Where do I start? I mean, I think it hasn't -- it's evolving slowly, but it hasn't changed from what we talked about before. When it comes to multifamily, we feel very good about our portfolio and the things that we're seeing in that -- with those clients, office space, same, we're seeing people paying rents. And so those are all in pretty good shape. And the big question is really around health care and -- but most mostly around hospitality, really retail hospitality, I should say. And in the retail space, I think we're lucky because we have a lot of multi-use properties, right? So some of the retailers as retail on the bottom, multifamily on the top. There will be some shakeout there. But so far, I think what really matters to us is, I would think what you'll see is you'll begin to see -- we've seen a lot of a migration into classified. We've seen that trend take place. Now the question is, do some of these end up going nonperforming. But what we think is really important is both our client selection and our protection on loan-to-value. And it's not just the fact that our loan to values are, were the low 50s, in some cases, 47% in New York City. So yes, you have protection when you begin to see prices coming down from the stress. But more importantly, at 47% loan-to-value. It means somebody has 53% of their equity, right? In that space and your behaviors are just different, right? Your commitment to those properties, and particularly the ones that are multigenerational properties is just vastly different than if it was a transaction. So we'll see some higher nonperformings over time. And we'll help those institutions out. And at the end of the day, I think I still feel confident that we're pretty well positioned. From your perspective, keep watching the quarters, I think it will develop over time as we get into the fourth and first and second quarters, I think the picture becomes much clear.

Helpful. You open the door into next year, so I'm going to ask. But with the challenging revenue environment, expected for most for next year, can you maybe just talk to the further expense leverage you can use to just maintain positive operating leverage?

Yes. We've done a number of things over the last couple of years, and you've seen that the -- because of the investment, the expense has been elevated in the past couple of years, but not as much as you think because we've actually been doing some things underneath. And I kind of feel like today, we're really gaining traction around looking at the firm, trying to find things that are maybe not all that important in the value chain and uncovering them. And so I feel pretty good when I look at the team's portfolio of options that we have going into the next 2 years around where we can become more efficient and optimized. So some more to come there. But I -- managing expenses is something that we do well. I expect that we'll be in a good position coming into the next year.

Yes. Just to pick up on some of that stuff, Jason. The -- to René point, a lot of the tech investment that we were making in terms of people and augmenting the use of outside help. We're in that cycle. So that -- you'll see an increase in that anymore. And a bunch of the increase over the last couple of years was also our mortgage servicing operation. As we acquired mortgage servicing revenue, the expense went up with it. And so there was a revenue piece that was driving some of that expense growth as well.

Helpful. We're about -- we're about halfway through when we've yet to touch on credit quality. So I feel compelled to go there next. The COVID-19 driven decline in employment economic activity has obviously been significant. I think investors have kind of struggled how to gauge its impact on income statements, balance sheets. Obviously, CECL forbearance have kind of complicated measures. But if you look at M&T, you've seen increases in criticized assets, people kind of looking at your DFAST stress test losses relative to allowances at the lower end of peers. I think people are just concerned about M&T's overall credit costs and then being maybe more severe than others. Maybe just talk to, I guess, kind of what gives you comfort with your portfolio? And can you -- do you think that outperformance can continue?

I mean my short answer is yes. It's interesting. We forget because it must be like pregnancy. We forget every time we go through one of these periods, whether it be in the early '90s or 2,000 or particularly in the Great Financial Crisis, we were saying exactly what we're setting now. It was only after that you actually saw it. And one of the things that you see through all those periods is we have average to above-average nonperformers, you -- we tend to move very quickly on classifying assets because you have to get in and make sure that if there's a problem that you're on top of the problem to be able to mitigate damage and loss in the future for that company. So what you're seeing today is even the rise in total criticized. While it rose pretty rapidly, I think that was us getting out the issues, and we're still a couple of points below where we were in the great financial crisis in terms of that total book. Much of the stuff today is in the early stages, like the watch kind of stages are criticized. And the question will be, when we look at that, how does it migrate into nonperforming, what percent goes into nonperforming. But having said that, again, it's the security and the way that we've underwritten that tends to result in low loss given the fault. And you see that just sort of time and time again, the stress test is very similar. I mean we're now reserved at or above what we had as it's experienced the losses we experienced during the Great Financial Crisis, right? So from our perspective. So what I'm really -- the other thing I'd say, what I'm really pleased about is, and I'll say this, in April or May of 2019, the team just decided that in addition to our normal structure and risk structure that we would get together on Wednesdays, and we would just review credit every Wednesday. And we did that because we figured 10 years of no downturn doesn't make any sense. So as we rolled into this, we had a really good sense of our book. And when I look at what we do every week and every month now, the team is on top of their clients. So we have good insight and transparency, right? That's what you have to have to have a really good allowance system. And I feel good about the attention to detail on our process.

Maybe can you maybe update us on the status of kind of loans previously under forbearance and how those are behaving now that we're kind of coming off that?

Yes. So I guess I can say a couple of things, and then you guys may have to fill in some of the banks. But if you think about forbearance, we might have given 90 days, you might have given 180 days. If you've given 180 days, that's still yet to come in the next couple of months. We'll get a better insight on that. But a very small number to date if people who come off forbearance and have asked for yet again. And in particularly, a place where we gave wide forbearance was with the auto dealers. And again, a very low percentage of those, maybe single-digit percentage of those, have to have come back. So far, so good. We're getting to a place where, though, if you were hotel, or in hospitality, or in retail, you probably were asking for 180 days, right? So you're going to see as we get a little bit into September and then more so in October, we'll begin to see and have conversations with those clients as to what they're seeing and what they'd like to do. So more of a fourth quarter picture, I think, will give us a lot more clarity.