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

All right. Good afternoon, everyone. We are pleased to have M&T Bank joining us for what is the first time. We believe M&T is the only bank out there that has been able to maintain a community bank field, while also maintaining a best-of-breed credit culture and industry-leading returns along the way. While the markets have been focused on its COVID exposures, the bank has continued to execute on its strategy of serving clients, building out technology and also while putting a tight hold on costs. Joining us to tell us more about how they're going to continue the momentum are Chairman and CEO, René Jones; and also Chief Financial Officer, Darren King. Today's presentation is going to be fireside chat. Maybe before we get started, René, would you like to make any open remarks?

Ryan, thanks. And thanks for having us. You mentioned this is the first. Hopefully, it's -- there are many more to come. Yes. I guess what I'd say is we've had this long string over several decades of success around providing above-average returns at the same time as providing above-average growth over decades. And most of that has been produced by really being very, very close to our customers. We say customers and our communities immersing ourselves in what they're about. And that has allowed us to produce those results over time. What's really exciting for me is that in some ways, as much as things have changed and are changing in the banking environment. One, they've always been changing, but maybe at an accelerated pace. Today, you get the same results for us. We're -- if I look back over the past 3 years since I took the CEO position, we've been able to do the same in terms of produced returns for shareholders. But maybe more importantly, we've been able to make some significant fundamental investments that are making us much more competitive over time. In fact, as we look today, even if you go deeper, our ability to grow accounts, our ability to get closer to the customers and our ability to sort of focus in and identify those moments that matter most for our customers and build loyalty is as strong as it ever has been. And so I look forward to your questions and chatting a little bit about the operating model, but it's an exciting time to be in banking.

Let's hope. Well, thank you for the overview, René. And maybe just to start, if you think about it, the universal banks were previously noted to have been growing faster and taking share from regional banks and community banks. That narrative has been that smaller banks have been disadvantaged because they couldn't spend as much money on technology, marketing and organic expansion in new markets. I guess, do you agree with this? And how do you see the rest of the industry, those less than $1 trillion in assets competing against the big behemoths. And how was M&T shaping its own role in this evolving landscape?

Yes. I guess I'd start off by saying, look, there are only some advantages to size, and particularly if you're running a national model that allows you to scale products and delivery out pretty quickly. But I'd start with the fact that, at least in my time, which is close to 30 years at the bank, we've been competing with large organizations the entire time. Oftentimes, we're competing in places where they've chosen not to go, which makes our services in those communities even that much more -- even that much more valuable. What has changed over time, I think, is that, in my view, if I step way back and particularly look over like, let's say the last 13 years since the beginning of the last crisis, the operating models of the larger banks in some ways have gotten similar. They were forced to get simpler. And that actually, I think, is a real positive thing because you take really, world-class talent and have them focus on checking accounts. That's our sort of worst nightmare, Darren and I. But having said that, there are also a lot of issues, I think, around complexity banking systems and the way we've been designed over the years are complex. They have a lot of noise that affects the customer experience. And so in some ways, I think that we are in a bit of a sweet spot where we're large enough that we can invest and have lots of capabilities that we can use to service our customers, we can lower the cost to serve, and we can find those moments to delight our customers. But at the same time, it's probably easier for us to do that because we don't have a lot of complexity. So if you step way back and look at the 6000 banks, there's clearly a bifurcation. I don't think that it's necessarily based on asset size, but we will have less banks. Your ability to keep up and focus on resource allocation and point to the right spots is going to be critical in the future. So that's how I'd start out with. I think on the ground for us, we are competing in a way that has busted sort of that -- sort of notion that you can't compete. Just a few stats, over the last couple of years now, we've had over 1% growth in primary checking accounts. When we talk about deposit growth and deposit share, we've taken share in both consumer and business banking accounts in the last year in 13 of our 18 markets. And what's really important to understand is that we don't just focus on deposits, we focus just on core operating accounts. So there's no high-yield hot money type of thing in there, and we're still able to produce pretty strong results. We -- this year, we'll -- as we finish the year, we'll probably have grown our business banking customers just shy of 4%, right? And all of that is by actually focusing directly at what we see as the most need at the moment for those customers.

René, you mentioned that you're taking market share in 13 of 18 markets. What are you monitoring to determine if you're gaining or losing share? What metrics could we, from the outside, look at? And second, as you think about this, what is it that M&T is doing that's causing customers to choose you? And why do your -- you have a long-tenured history of maintaining customer for a long time. Why are they staying with the bank?

Sure. I mean, I think 1 of the things that hasn't changed is that we've grown modestly in some of the best times. But then in times of adversity, it really kicks in. And I think the principal reason is in times diversity where your customers really need a financial institution most, and it's really top of mind. So if you're actually able to get them in those moments that matter, which we traditionally have been because we've been so close to the customers with our sales force and the people on the ground and in the market. But today, we're doing that and enhancing that experience with the digital experience. So we like to call it our approach recently of being digitally forward but locally focused. So if you think about PPP, it's a perfect example. When PPP hit, it was really, really important that we could partner with a Fintech firm. Think about this. That means they had to want to work with us because if we were slow, they wouldn't work with us. And then 72 hours, set up a great system. But really, on the ground, what you heard people say is, when I was sitting there in my kitchen and my relationship bank, Ryan, was either on the phone or in my kitchen coming to help me out, right? That was the moment that made a big difference for me. So our ability to do that and then execute end-to-end from that customer's kitchen all the way to the back door with APIs into the SBA, which is an organization that we've known for years, right, this year, we're the fifth largest SBA lender in the U.S. As you string those experiences together, that has really made a difference as an example of what we're doing on the ground. I think the things that we look at in a macro sense is number one, Net Promoter Score, do the tests as -- we do it internally, but you can do the same by surveying our customers and looking for improvements there, looking at retention. Are we retaining our customers at the same rate or better than we used to in the past? And then looking at where the growth is coming from in our particular accounts. So for example, if you look at over the last year of all the account growth that we've had, we think something like 48% of that account growth has been with customers who were 35 years of age or younger. 2 years ago, 2018, we used to have about 25% of our book were under the age of 35. Now that's 27%. So it's not only that you're growing, but where are you growing, right? And what does that portend for the future.

Got it. And you gave a good example of using PPP of your technological capabilities. I know the bank has built a robust internal IT development capability, and you've established what you're calling a tech hub in Buffalo. I think a few years ago, there was a narrative that you were behind on tech investing. But obviously, the bank has invested a ton of money into technology over the last few years. So can you maybe talk about the major investments you've made in technology? How they led to a short-term increase in expenses? And how will they pay dividends in the future? And just from the outside looking in, how do you assess the return on these investments? And how do we think about whether they're driving revenue growth or reducing expenses?

Yes. Yes. Yes. So I guess if you go back maybe 4 years ago, I think -- and then as I came on as CEO, it was clear to us that at the time, the way we articulated is that we've under-invested in tech. But I'd step back and now I look back and say that we had to do a big change in our mindset. And really, what has happened is we've really decided where to allocate our resources and how to do it. So basically, we were trying to put in very large solutions over time that would take a long time to implement in space. And now what we've done is we've sort of changed our operating model around tech to move much faster, to find the pain points and to make the investments that makes sense and speed up and get more value out of the spend that we were always doing. But to do that, we had to really build out a bit of our infrastructure, and there were a couple of tenets that we saw that just didn't make much sense to us. We were outsourcing a really significant amount of our tech spend or our bill to vendors. And if you're going to focus on things that are going to be a differentiator, and not necessarily use all your funding to just catch up with everybody. What you needed to do is bring those resources in-house. And even if you're going to -- whether you're going to build or partner, either way, build or partner, your partners don't want to partner with you unless you have that speed and agility in the space. So the first move we made was to bring in all of our contract workers. I think we're on commission to add 1,000 to 1,500 internal technologists. The second thing we did is we actually had to change our focus. So we -- on the types of talent we were getting, you know the bank has invested, gosh, 35, almost 40 years now in talent development program. I came through one, joining the bank in 1992. And we had to expand those and expand them to technologists to user design engineers to build the platforms and the infrastructure, which were mostly in the form of human capital that would allow us to build and partner and move faster. At the same time, in -- back in '17 and 18, we're in the midst of changing a lot of the more fundamental pieces of technology in the banks. If you look at the commercial bank, we have redone end-to-end commercial lending platforms from origination through booking. We -- and if you think about that, much of that was in paper form. So effectively, what you were doing is digitizing or setting up for the digital environment going forward. We put in new cash management systems. We've launched a new platform for the merchant services. And then if you think of the retail side, we've done a lot of really shorter term, smaller things that are very impactful to the customer experience. But 1 shift that we were able to make was instead of doing an onboarding for each silo for trust, wealth, commercial banking. What we decided to do is aggregate our resources around having a better onboarding experience that could be leveraged as a platform across any 1 of those businesses over time. So really trying to get more bang for the buck out of our spend, thinking about enterprise spending, building infrastructure over time that could be leveraged in there. I'll stop just because you had a long question, but...

yes. No, sure. What I was going to say -- what I was going to ask, René is, René you talked about the switching of the outsourcing of tech from vendors. I guess the question I wanted to ask is, how far along are you in this transition? And should investors view this as a shift in mindset? Or are you still looking to do partnerships with Fintechs? Or is it much more of a, let's build internally now?

No. So I would -- I think the way to think about it is -- yes, the first step is we're our way in terms of the cost of that. I mean, we've now hired probably close to 600 technologists that we brought on board but there's a point where the outside technologists and the vendors were actually more expensive as well, right? So we're at that tipping point where the benefits are greater now than the initial because initially, we had to bring on the technology to start in the first 300 and so forth. So we're at that tipping point. But the way to think about it is that you're trying to control your own destiny. And it doesn't mean that you're not going to partner on the outside. And quite frankly, we'll probably partner more now because we have the right skill sets where people and Fintechs, for example, want to partner with us. You were -- in the past, if you were trying to do your partners with outside firms, if you think about it, you have to sort of clash or cultures where you're using the old sort of way of technology and people would say, gee, it's a little too slow for us to actually deal with you. So today, I think the way to think about it is we are -- our strategy is really to keep our customers at the center of everything. And so we have built teams that look at customer journeys and then identify the need, then we bring that idea back in-house, and then we decide, do we have the key critical capability to solve that particular problem? Or are we better partnering on the outside? And then we go and make that decision and go and build. And that is happening in a very iterative fashion, right? So an example would be, we had our suite of things we're doing, COVID hit, we got together in the pandemic, someone raised their hand, said, you know what, I think we're going to have to e-notification or e-DocuSign and give the notary service to be electronic. We had that thing up and running in weeks. And immediately, people started coming into our branches and saying, geez, you're the only branch I could find that had this e-notification, right? So that speed to be able to go to the problem in a moment that matters all is serving your customers, but it's also beginning to give you an advantage. And in the past, what we would be doing, whether we were working with a partner or not, is we'll be taking 9 months to a year to build that solution and most likely the moment would have passed.

The thing I'd add to the thought, Ryan, is it's not necessarily about picking a path, but actually, it's creating options, right? We're giving ourselves, by the way, we've built this more optionality about the path we can go down, whereas before we were kind of locked into, you got to think big systems, big projects. Now we've got the ability to do inside outside partner build or buy. And really, we're trying to be agnostic as to what the solution is and how it's developed and more to René's point, what's the right thing for the customer and for the bank, and we want to create as many avenues to solve that problem as possible.

And just -- I'm sorry, 1 more thing, Ryan, that I'd add is that if you -- the measure for me is that as you're running around talking to Fintech firms or whatever, you should be able to say, what's it like to work in M&T Bank? Partnering with M&T Bank, what's it like? And our goal is for everybody to say, we love working with those guys, right? Because at the end of the day, that differentiation will be a strategic advantage.

René maybe 1 last question on the topic. So digital has been a big buzzword at the conference. Everybody is talking about the environment that we're living through. And can you just talk about the digital investments you're making? Are you accelerating them given what's going on in the pandemic? And how do you determine what's the right amount of capital to allocate towards these digital investments?

Well, I'll start by saying, we tend to sometimes think about digital because we're in the banking industry as a banking thing. But the reality of it is that every one of our customers, the digitization of their business is changing their value proposition their value chain. One of the things I'm on the Board of ACV Auctions, right, which you begin to think about what we know as a bank in the auto floor plan business and the dealers is being revolutionized, right, today by the digital process and different partners and competitors that are in the space. And so as a bank, we have a choice. We can be part of that process for our customers, in this stage dealers, and we can build our own capabilities so that we can be part of that journey for the customers or not. And part of that is actually stepping back and looking at our own value chain and looking at the places that matter the most, where are the most critical factors to put investment. Usually, what we do is we let the teams bubble up those areas through areas of friction. And so what we're seeing is as those things bubble up, and we begin to solve customer pain points looking at complaints that come in. So for an example, just to give you a feel for the environment in M&T, every other week, we have a meeting with the top 120 employees, and the meeting is called end your week with a customer. We sit around on a Thursday afternoon or Friday afternoon and 120 of us listen to customer complaints. And from there, you've got things if you look at where we've been, we've moved to digital appointment setting, which was happening as a pilot in Baltimore, put our Mission Maryland work before the pandemic hit. When the pandemic kit, we put it to every branch across the entire network. Video conferencing, live chat, think about our platforms in wealth around having an additional portal for our advisers so they can more quickly respond to customers. I mentioned the onboarding process where we're looking to either lower the cost to onboard, lower the cost to serve or maybe actually just shorten the time that it takes. I think we were probably 2 years ago, I can tell you today, it takes us probably 6 minutes to open up a checking account end-to-end, and that probably was something like 20, 25 minutes, 2 years ago. So we're looking and listening to the people on the ground that are facing the customers. We've built systems to capture all those things, and we're making adjustments. If you think about it, in the past, once a year, we have a big plan. We think about what we were going to do, and we go on that measure to make those investments regardless of what the customers and the feedback was telling us, so we've changed that.

René maybe switching gears. If I go back to your opening remarks, the start at the stock's always traded at a premium to peers, given both the combination of better growth, superior returns and it came with lower volatility of returns. But in a [indiscernible] environment, returns seem to be converging and investors seem to be willing to pay less for the optionality of higher returns. So maybe a 2-part question. What leverage do you have to improve returns in this environment? And what do you think the market is missing?

So look, I think a couple of things. I don't -- we talk about returns converging. But the way I think about it is if you double the amount of capital in the industry, then capital allocation and capital management becomes twice as important, right? And so you all to start by remembering that we're a levered institution. I love the work that John Maxfield did in the Bank Director magazine where he just pulled out the quote recently from 1990 in Buffett. And talking about the fact that when you're 20x levered, small mistakes make a big difference. So we go through these periods from time to time where in the banking industry with that leverage, what you're trying to do is cover your cost of capital through multiple cycles. And then if you step back and look back at M&T. As far as we can find, there are only a few banks that have covered their cost of capital in every single year, looking back a decade, 2 decades, maybe a handful, maybe 2 or 3. And that's -- I think that ends up becoming the most important thing. Because from our experience, it's what results in growth in a consolidating industry. I do see the focus today. There's a lot of focus, I think, not just in bank stocks on growth, on high-growth stories. I've seen periods like that before, quite frankly, in the early '90s, when I joined the bank and several years after, we were always valued much lower than one might think we should have been. So we did have to worry about it because for us, our focus on shareholders is long term holders. I would say, today, if you think about it, somebody who's investing their money around pensions and things like that, the combination for us of never going below your cost of capital and growing year after year at average to slightly above-average tends to produce those winners. The fact that there are alternatives and people are focused on growth today, I think it's nothing you really can control. But what I do know in the banking industry specifically, with the amount of leverage that we have, we're not growth companies. We're growth by default, right? We didn't make a mistake. And I find it hard to believe that, that's going to change. What I do think is an opportunity for banks is, I think that the cost of operating should be much, much, much lower than it is today. And if you think about it, we've all been operating at 55% to 60% efficiency ratios for decades, amidst all of these new technologies and all of these ways to move faster. And I tend to think that the upside in the banking industry is going to be those who can figure out how to break the 50 barrier, which should be very doable, given the tools and capabilities and innovation that's happening today.

René, you talked about the banks as not being a growth industry and one of the common themes we've heard at the conference is the expectation is that there's not going to be a lot of growth in the year ahead. So assuming you put up strong earnings, you're going to generate a lot of capital. I guess a 2-part question, what are your thoughts on returning capital in 2021? And you've always maintained a conservative dividend. How do you think about the mix of capital distribution over time?

Yes. I mean, I haven't changed my thought process on what works. The question is, is it doable? First of all, I do think that our long-standing thing of having a slightly below average dividend yield, which actually, by most companies in the S&P standards is a high yield. Banks tend to have higher-yielding dividend yields. And I think it's prudent. I think the consistency and being able to cover your dividend and being able to sort of manage capital that way is really a prudent thing from a risk management perspective. And quite frankly, when you think about it, if you mess up in that space, you're going to have to issue capital, and you're going to have to issue capital at the worst possible time. If you look today, extend out using a 2020 forecast, so forecast for the last quarter, and you go back to 2007. Of the top 20 banks today, the 20 largest banks to date, 10 still not reach their EPS growth. So half of the industry hasn't grown. If you're a day trader or if you're focused on the 2 periods of time to find the winner for the year, for the next 2 years, that probably doesn't matter. But if you're thinking about long-term investing, I think our record is something like over that 13-year period or something like we've got 3% compounded growth in EPS. And I think we might be on 5%. But this Is the industry that we're talking about here, right?

Sounds exciting.

So I would expect that -- I think I'd also say that excess capital is part of the problem, right? People feel and we -- all of us, all of us feel like we have to do something with it. And so I think that we're probably now much higher than our optimal capital structure should be, both internally as we look at it, and both as the Fed stress test actually sets, right? And so I think a component of buybacks and getting that back to an optimal structure, optimal target structure is going to be ready.

And maybe a 2-part question, René. Any 1 -- any sense what that optimal capital level is? How should investors think about that? And 1 way to deploy -- potentially deploy capital would be something that you mentioned numerous times in that M&A. Can you maybe just talk about your view of M&A for the industry and do you at some point expect M&T to be a participant? And what do you think the catalyst of that will be?

Yes. I mean I'm pretty straightforward. I am very confident that the banking industry will continue to consolidate. I think at the heart of that consolidation will be, in the long term, it will be your ability to win your customers and to have a good customer experience and to keep pace with the investments that are necessary to do that. And then from time to time in short periods, it's all to be credit or it will be environments like today with very, very extreme low interest rate environment, which just make it very, very hard for -- particularly, for I want to say smaller banks, but I shouldn't say smaller banks, it's probably more like having a robust operating model. The fact that a significant portion of our fee income comes from the trust business from the wealth segment, right, is a huge asset for us. It makes us less volatile and takes pressure off of just the deposit and loan business. But at the end of the day, for us, we believe primary asset in banking is the core checking account. And we think there's lots of opportunity to take M&T Bank and our experience in what we do to communities into communities that don't have M&T Bank. And so we will continually look the partnership that allow us to add value. But we won't go somewhere for the sake of going there. It will have to be a place where we can add value.

And you talked about, I'm guessing, traditional bank deals, but you also referenced trust. How should we think about the diversity of deals, bolt-on type acquisitions, whether in the Fintech space or in something like the wealth or institutional services space. How open are you to varying degrees of deals?

You're going to bring me back to the beginning. So at the beginning, I said it's a fun environment to be a banker. And if you step way back, it is. I mean, think about this in our space as bankers, everybody across the country and in the world is trying to innovate and try to make the processes better. And the probability that we come up with all the answers is pretty low. And so some form of partnership to have to change, and it's pretty clear that we're going to get a change in the mix of -- you're going to have to look at those other capabilities and figure out how to merge them together. Take our critical assets and match them with other people critical assets. Sometimes that might be a partnership, sometimes that might be an acquisition.

Maybe shifting gears. I think 1 of the reasons why the stock for at least for a while had traded lower than fundamental value as credit. And you guys were aggressive in utilizing loan forbearances. And I was just wondering, can you maybe just give us an update on forbearance trends you've seen? And then second, I think a sizable portion of the CRE loans were under 180-day forbearance. Like any updates just on the status of any of those loans? And how the portfolio is progressing?

You want to handle it?

Yes, sure. So what we've been seeing in the fourth quarter is very consistent with the trends that we saw in the third quarter in terms of loans that are hitting the end of their forbearance period. You remember correctly that we talked about a portion of the real estate portfolio that actually had 180-day forbearance. And those have reached -- many of those have reached the end in October, November. And the percentage that are going back to paying as agreed, is consistent with the percentages that we saw in the third quarter. We will see some small number that we'll ask for a second extension. So we won't be completely at 0, I don't think at the end of the year but will be down meaningfully again. And you'll probably see some folks that will end up as troubled debt restructures or nonaccruals, that's just part of the process. But in many cases, we're also seeing customers coming back. And while they're looking for restructure, they're also bringing something to the table to enhance the credit. There could be additions to interest reserve, there could be more equity. And so each situation is unique, but the trends are consistent with what we've been seeing before. So we feel good about what we're seeing.

And Darren, any updates on the New York City commercial real estate portfolio? I know, obviously, that's been a portfolio that's garnered a lot of attention. We had signature before this. We said the portfolio seems to be holding very well. Just curious what you're seeing out of that portfolio?

Yes. We're seeing the same thing. I mean, obviously, New York had been under some challenge. I think the 2 sectors that we probably pay the most attention to our retail and hotel. And I think we talked about this before, but when you look at what's in New York City in those 2 sectors, it's about 1% of the portfolio. And New York City, in particular, actually tends to have a lot of our strongest credit metrics in terms of loan-to-value and debt service coverage ratio. So -- and guarantees from borrowers. So in general, the trends that we're seeing there in New York City are no different than what we're seeing around the rest of the portfolio. And similar to what you had heard in your prior interview but also starts from a great position, so in terms of the structure of the deal. So we're feeling positive with what we're seeing, but also recognize we've got a ways to go yet.

Got it. We've got about a minute or 2 left here, so I'm going to -- I have 1 question for you and 1 for René, so maybe we'll go on speed asking. Just given the challenges the industry is likely to face on the top line, Darren, can you maybe just discuss some of the operating expense levers that you have as we look into 2021?

Yes. I think you've seen us flex some of those already this year, in terms of just changing the way we do the business and do the work. The straightforward things that you saw were managing travel and entertainment expense and managing growth in headcount and taking advantage of people's skill sets and shifting them around the bank to areas of need rather than hiring. You've seen us be a little more discerning with advertising and promotion. And so those were the easy things. What we built from there on are some of the things that René had talked about. So we continue down the path with what we call our tech transformation and shifting from contractors to on staff, which ultimately is cheaper. But really, the work that we're doing on, I think, the term in the industry is journey mapping, but it's really looking at the process right, by which customers go through and looking for ways to simplify it. And through those efforts, to Randy's point about where the efficiency ratio in the industry could go. We think there's opportunity there, and you just keep chipping away at that. And it's in a continuous improvement kind of fashion. It's not a big bang that we can continue to manage expenses flat to down. I may not be down all at once, but we're able to maintain very disciplined expense growth as we go through this challenging revenue environment.

One last question here for René, René, we had Steve Schwartzman on a couple of presentations ago, and he was talking about ESG investing. I know it's become a hot topic in the investor community. How important do you think the ESG factors will become for investors over the next few years in deciding whether or not they purchase M&T stock?

I think they're going to be -- first of all, I think they already are really significant. I think that if you look -- and I think it's -- quite frankly, I think the ESG thing is 1 of transparency. I don't necessarily think it's 1 of not compliance, not doing the right things. But I think it's taken a while for folks to understand that the transparency is really, really important what we're doing. And ultimately, I think as we sort of all roll out our ESG program, going to begin to see how important and how great a community partner that the banking industry is. But there's a ways to go there. I don't think it's going to reverse because I think it's very much like hiring talent. The talent only wants to come to a place that's socially conscious that's doing the right thing that they can be proud to work at. And the same is true of where we're going to ultimately invest, where people are going to ultimately invest. So it's not top priority for us. And aggregating and putting more transparency around what we do in those areas and those efforts for us, but really, really important.

Well, unfortunately, we are out of time. But René, Darren, Don and Mike, just want to say thank you very much for joining us. It was great to have you guys here. I look forward to hopefully having you guys back for many years to come. Have a happy holiday season and look forward to connecting on the earnings call.

Thanks, Ryan. Happy holidays.

Your too. Take care guys.

See you, Ryan.