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

Up next, we are pleased to have M&T Bank joining us. M&T has navigated the environment better than most, peer-leading margins, strong capital position and continued focus on risk management. Combination of these has made M&T, one of the best-performing bank stocks in our coverage in '23. Joining us for the first time, I think, in a very long time as Chief Financial Officer, Daryl Bible. Today's presentation is going to be a fireside chat. Welcome back, Darren -- Daryl. Darren, I was like I had Darren here last year.

It happens every day.

Darren and Daryl. So you've been at the company about 6 months now. As you've gotten to know the company and the culture, what do you think makes M&T different?

Yes. So first, thank you for having us here and very excited to be here. I believe that the company is really a reflection of the leader of the company and we have Rene Jones, who's been leading the company now for about 6 or 7 years. And I think our company reflects kind of what he believes in and how he handles himself and the company. And he is, without a doubt, a strong voice in the industry. He's super smart. He is unbelievably -- I mean, what we say, we do, we actually do. I'll give you a perfect example. Right when I first joined and we were just coming out of the March, April time frame, and we were limiting capital and liquidity. And we got to look at the businesses and try to choose who gets liquidity and who gets the funding and all that. And I said, I've done that before many times over my career. And you can kind of look at some of the businesses that aren't relationship-driven like indirect auto potentially. And he stops me in my tracks and he goes, "You missed the most important thing," and I looked at him. He goes, "We support our community first." And whether it's in that business or in any other business, we support our communities, and we really believe in our communities. So M&T's culture and making a difference in people's lives really comes to life every day at this company and we're just proud to have the privilege of making that happen.

So very good to hear. So as I started with '23 was obviously, everyone knows in this room, a challenging year. Share prices struggled versus the broader market. However, M&T was the best performer in the group. Can you maybe just talk about some of the key things that you did to navigate the current environment? And how do you think that positions the bank to succeed going forward?

Yes. When you look at what happened this past year, M&T has performed extremely well and continues to perform extremely well. I think it comes down to some really basic rules to follow. We don't take a lot of risk. But diversification matters. When you look at our business model, we're diversified in consumer, we're awesome in business banking, commercial, CRE, wealth, our Corporate Trust business, really develops and really diverse portfolio. I think the other thing is that we are really big believers and when we go to market and we go get new accounts relationships, we really drive to get the operating account. It's a simple thing to ask for but we are great at execution. If you look at business banking, if you look at the deposits we have in business banking, we have 4x more deposits than we do lending. But the deposits, 87% of those are operating accounts. I mean, that's unheard of in that space. So we really have a great core funding base. So that diversification, that core funding really gives us really strong, stable performance over time. I think the other thing that really matters is tangible common equity. It always matters under stress. Over the last couple of years, M&T, we really didn't take any big risk from the investment portfolio. So if you look at our tangible common equity ratio 7.8%, we're about 300 basis points over the peer median there. So we really do believe in being conservative, being precious with our capital and really doing the best thing, not only for our customers and communities, but also for our shareholders.

So the market has been focused on net interest income and when it will it bottom and when will it eventually grow again, we spend a lot of time talking about that in the discussions yesterday. You've noted that you -- we need to see deposit disintermediation slow before it levels off. Maybe can you talk about how you're feeling about level off or trough? And beyond that, what do you see as the drivers?

Yes. So putting the plan together, we gave a preliminary plan to the Board in November. And I got -- I was getting questions from some of the directors. And one of the questions was, where are the risks in the plan that we are presenting to them. And said the hardest thing to really predict right now is the disintermediation of deposits. It seems to be slowing down but we still have DDA shrinking and you still have it going into sweeps. You still have your CD book growing. So that disintermediation is real and still happening. It is really hard to predict when that's going to settle down and stop. Really depends on the rate environment and if and when the Fed starts to lower rates. But if you look at what we're planning for, whatever, we're expecting, if everything in the plan comes to how we projected and it never does, it would probably be middle of the year is kind of where things would level off but you really don't know right now.

So thinking a little bit more near term, in the slides, you provided an update on the fourth quarter. Do you maybe want to walk through some of the observations that you saw in the quarter. And maybe just talk a little bit about how the quarter is progressing?

So quarter is going really well. Our company continues to execute and perform at a high level. Our guidance really didn't change from our earnings report back in October. NII is basically in the same range. We're tracking probably in the middle of that range. Fees, plus or minus for the $560 million level. Expenses are pretty much tracking kind of in the middle of that range there right now. So it's good to be consistent and predictable from that perspective. As far as charge-offs go, right now, our sense is we're going to come in at maybe a little bit better than the long-term average of the 33 basis points for the year, really know until you get to the last month, but right now, our credit seems to be in really good shape and holding strong from that perspective. If you look at things on the balance sheet, our loan growth is really pretty flat but you have a lot of churn going on in the balance sheet there. You definitely have decreases in CRE, which is what we've been doing now for 3 years, and we're going to continue to do that for the next year or 2 as well. We are growing C&I, and C&I growth in the middle market, large corporate, specialty categories there. On the consumer book, home equity is coming down a little bit, but we're having a little bit of growth in auto and rec fi to offset some of that. So net, it's pretty stable. I would love to see it grow and be positive. But the businesses are performing really well. We're going to take what the market gives us. We are not going to push it. This is not the time to push credit risk but we're out there. We are not on an RWA diet. We definitely want to continue and grow customers. That means loans as well. We're just being really prudent on what we are going after in the marketplace.

So M&T historically has talked about a NIM range of 3.60% to 3.90%. When I sat here last year with Darren, we were questioning whether or not we would actually get there. Obviously, the world has shifted a lot. We've gone through a lot of different things. And based on expectations, we're likely to appear at the low end of that range. So can you maybe talk about the path to getting back to that range? And do you still think that's the right level for M&T?

Yes. Darren has a tap back to follow. He has a huge vision going out pretty far and all that stuff, super, super smart, but I'm kind of glad he's running the consumer business. He's doing a great job running that business now. A long-term average is an average at the end of the day. So 3.90% to 3.60%. We were above that earlier this year and last year. We're probably going to peers and go under 3.60% sometime next year. If you actually look at just margin, there's a lot of things that impact margin on our balance sheet today. So we've consciously -- even though the rules haven't changed from a liquidity perspective, we've taken the learnings from what happened back in the March, April time frame. And we basically redid some of our internal liquidity stress scenarios. And we're looking at kind of the nonoperating deposits that are uninsured. We're looking at different time frames of maturities and all that. And we're running with more liquidity. More liquidity doesn't necessarily impact NII because of the shape of the curve and all that right now but it does dilute the margin down some. So you're seeing some of that impact on that and you'll see that in the results. The margin may come down but our NII seems to be intact from that perspective.

So in the slides, I'll call that you may tweaked the thoughts on deposit betas. Maybe we're talking mid- to high 40s versus high 40s at some point. Maybe just talk about where you're still seeing question across the book. Is it this disintermediation that you talked about? And one thing that's been widely discussed over the last days, how do you think about the ability to bring deposit costs down, given what we just went through when the Fed eventually does tighten?

Yes. So if you really look at what we are doing and you look at the rate sensitivity piece, we have a slide on that, our rate sensitivity has been coming down, so that we are relatively neutral right now. Maybe we get hurt a little bit if rates fall but pretty neutral if rates go up right now. We've consciously tried to use natural hedges on the balance sheet. We are pushing more of our funding to shorter duration. So we're pushing more money in money market accounts, whether it's customer even in the broker book that we have, the $12 billion odd, 1/3 of that is in money market broker. We're doing that intentionally to make us not asset sensitive and to make us more neutral and maybe eventually make us a little bit liability sensitive. So that's a conscious decision from that perspective. If you continue to look at other things that are out there from a deposit perspective, we are consciously trying to grow deposits. And our product managers, both in the consumer and commercial, and we've grown both of those again this quarter. We're up about 1% overall in there. We're trying to figure out the mix of what it takes to grow those accounts so we can get out of some of the non-client funding sources and do it in an economical way. And I think we're just learning from that and pushing through and being -- having some success with all that. I mean at the end of the day, the right side of the balance sheet is really what's driving the value and the more tools and the more expertise we have on how we can grow it and grow it efficiently, I think, is really important.

And then we'll certainly touch on deposits shortly. Even in the fourth quarter update, you talked about, I guess, established loans for the quarter. I think we have been talking about maybe a tiny bit higher. But just given the strong capital position while others are dieting. Maybe just talk about what you think this means for the opportunity set to look forward? And what would it take for you to get more opportunistic on the lending side in to '24?

From a lending side, we have our credit box. Our credit box really doesn't change. So we have that there, and we're trying to do everything we can that meets that credit box. So we're all on, really try and focus, trying to grow the loan book. We are shrinking CRE just because that's a mix change that we need to come down from an overall diversification perspective. But from that, we are continuing to try to push and grow lending that makes sense for us but we are going to stretch and change our credit box from that perspective.

So we've seen a lot of banks move to build liquidity. I think you guys are probably the biggest sitting on $30 billion of cash and you referenced it earlier, building for some pending regulations and the like. But how are you thinking about managing this liquidity over time, just given new regulations and the desire to have a buffer?

Yes. So if you look at our balance sheet today, we have about $60 billion of highly liquid assets, half of that being at the Fed. That's intentional, and we choose to keep that. Also one of the things that we've put in into targeting from a policy perspective is there's a certain amount of liquidity we want to keep on balance sheet at the Fed. A lot of that depends on how much is operating through the company and you want to operate with a cushion over that. We don't need to have $30 billion there, so we're being a little conservative. But I think you're going to see us always have a fair chunk there really just to operate. And as the Fed Payment now system comes online, I think you want to have some flexibility and make sure you have safety there. So we are really positioning the bank to be still really strong and conservative over a consistent time period.

So you referenced deposits before the goal to grow them. Capital markets have essentially been closed for Category III and IV banks issued debt in the second and third quarters. But -- so therefore, like banks like M&T leaned into brokered, I think you have $12 billion to $13 billion now. More recently, you've had a lot of success growing core customer deposits, which has been great to see. Can you maybe just talk about some of the strategies, one that you have in place to grow core customer deposits? And what is your plan with the brokered and debt funding levels going forward? And maybe just touch upon how does the new long-term debt proposal impact that? A lot in there on funding.

Yes, there is. So back from my treasurer [indiscernible] up in Minnesota and all that, I'm a big believer and always on. So we have really 5 core businesses. You have our consumer business, business banking, commercial, wealth and institutional corporate trust. We always want to be out in the marketplace. We always want to be competitive. We don't want to be the highest, we don't want to be the lowest, but we always want to make sure that our sales force is equipped with a competitive interest rate so that we get our share of funding from that perspective. I think we are having success doing that. We will continue to execute on that. There's a couple of other things, process-wise in the company. We're working on to build infrastructure there. But we will continue to focus and maximize as much funding as we can. Our goal is actually to fund the whole company from customers and not rely on non-class customer funding. From a long-term debt perspective, if that rule goes in as projected right now, we have approximately $7 billion of debt in the company. That's split between bank as well as from holding company. And if you look at how much debt we need in total, at 6%, it's a little -- call it, $10 billion, a little less than $10 billion from that perspective. So marginally, there's a little bit more that you need but you always want to run with a buffer. I'm also a big believer that you want to make sure that the holding company has fair amount of liquidity. So it's a source of strength and times of stress. So if you add that and put that all together, you're probably targeting about $13 billion of debt, overall in the whole company is what we would operate. So that's incrementally about $6 billion from what we have today. If phase-in period is 3 years, I think we can easily do that. Now when we do that, the goal will be to -- I think we have about $4 billion of federal home loan bank advances, [ $12 million or $13 million ] a broker. We're just paid down whatever we think we need to so we don't actually gross up the balance sheet more, we just have a mix change. It's still be incrementally more cost but that incremental cost really depends on what's happening with credit spreads. It's about 100 to 150 basis points incremental more cost. But it's the right thing to do and I think we can do that pretty efficiently over time.

Maybe just to round out the discussion on deposits. You've recently talked about continued deposit disintermediation and noninterest-bearing coming down from, let's call it, low 30s, down to around 30%. What gives you comfort that this may or may not be the right level? And what have you analyzed so you're comfortable with that level?

So talking to the team, if you look at what happened last year and this year, we're seeing the same thing happen in the fourth quarter. We had a drop in our DDA balances. And I think some of that could be seasonality. So if you look at us, quarter-to-date, we're about 31% now down from 33%. We'll see how that plays out for the rest of this quarter or whatever. But if you look at historically, our bottom was 25%, but that was pre-Wilmington Trust, Wilmington Trust has a huge amount of noninterest-bearing in there, call it 5% or 6%. So that's how we came up with that 30% threshold. I'd still keep that there 30% plus or minus until we know something else is different there. But that is probably the most important factor from an NII persective, when you go basically turn something from DDA noninterest to basically interest bearing, that's a huge impact to this level of rate.

High incremental bid.

No doubt.

All right. Maybe shift gears, talk about some expenses and some investments. I know we'll get formal guidance in January. You did recently note that you expect modest growth increased, say, up 1% to 2% year-over-year. Can you maybe walk through some of the moving pieces underlying that? Where are the opportunities for efficiencies? And can you achieve your goals of continuing to build out the people's markets, investing in operations and tech and infrastructure while holding the growth to low single digits?

So joining M&T and having its long-term history of really being a well-run company. I came in here thinking if we're so well run, I'm going to basically challenge my peers to see what they can do on their own. So we met as an executive leadership team talked about '24. In '24 we know our net interest income is coming down because margin is coming down some. And so we really can't show a lot of expense growth just because you got revenues coming down overall. We have some investments we need to continue to make in this company. We always want to be investing in the company from that perspective. So we talked about it, and we agreed as a team that everybody would basically come in flat on an expense basis, fund their merit. Our merit will be 3.5%. So they're self-funding merit. And it's really up to the business leaders to decide how they're restructuring their groups. There's reorganizations going on and process changes, some automation, some transformation, whatever is actually going on in each of those areas. So we have a budget where all the lines are basically flat. And then you look at where our [indiscernible] and what are we going to do from an investment perspective. We talked about finance modernizations coming in. We're investing in a new data center in Northern Virginia. We're investing in our digital platforms, consistently, our data platforms. So all that has to be accounted for. So I basically take flattened [ add ] 1% or 2%, and that's pretty much what's going to be the expense budget for next year.

So maybe to just build on that a little bit. So you talked about replacing your GL system and improving processes with that. Maybe just expand upon the points you just made. What are some of the big tech investments that you're making? And where do you think this puts you relative to peers? Do you think this puts you ahead? Do you think that there's more work to do? And what do you think the area is using your expertise that you just talked about to improve the operational efficiency of the company?

Yes. So Mike Whistler and his team, one of the things that I was really surprised on was like an aha is how much our company is using agile versus my prior life. We do basically everything from an agile perspective and go to market. So we're always innovating and always trying to get better. Doesn't mean we're perfect there, which you find out in the agile process, the product leaders are probably the most important people. Those are the people in between the business and the technology folks and really trying to get everything coordinated. That's really where -- it's really important that we kind of stress and get the priorities that we need to get that there. But from a technology perspective, we continue to obviously invest in cyber, that's huge. We are putting a lot of our infrastructure up in the cloud, if it's cloud ready. What doesn't go into the cloud is going into the new [indiscernible] data center in Northern Virginia. We have a new backup data center going in another power grid in Chicago. And all of that will be completed over the next 3 to 4 years. So it's a gradual process that we kind of go about to doing that. We've been doing that now for 2 years and really haven't talked about it. I'm more transparent. I like to talk about what's going on in the company. But we're always investing in the company, always getting better. Mike Whistler and his team has that mindset of always continuously improving and getting better from a technology perspective.

So maybe shifting gears to talk a little bit about credit. So you guys had a couple of new slides in there. I appreciate that, thank you. I have a cough, I don't know you want to [indiscernible] about. To think about credit, net charge-offs are as you just articulated in the quarterly update, going to be a little bit below the long-term average of 33, give or take. As we look ahead, and given the challenges we're seeing in certain asset classes, rising criticized assets, do you expect credit losses to continue to have an upward bias? And what are the drivers?

Yes. So I think this year, I think we've had really good credit performance. Where we've had charge-offs, the charge-offs have been in more the stressed CRE portfolios, some in health care. The health care is really related to freight, primarily the state of New York just because of the regulations and the staffing issues and skilled assessment that you have to do it in those areas just the higher cost of -- to delivery from that perspective. If you look at on the office portfolio, it's been a mixture. It's been spread out through all the major cities in our footprint, whether it's New York, Boston, Connecticut or whatever, it's kind of a spread out portfolio there. I would continue to see normalization in that portfolio. It's probably be my best guess. The economy is slowing down, like the Fed wants it to do. You definitely are seeing inflation, maybe not on a year-over-year basis showing but if you look at it on a 3-month or a 6-month basis, it's definitely that being in the 2% ranges. So I think the Fed is accomplishing what they're trying to do from that perspective but definitely normalization there. Our other portfolios, I'd say, overall, consumers were prime shop, so we aren't seeing a whole lot of strength there for the most part. So I think it's performing well. We are really good at credit underwriting. And when you look at the experience we have in our credit shop and the processes that we use, at the end of the day, it's client selection. We are dominant players in the markets that we serve. That dominance helps us pick the best clients in there to bank from that. And you kind of see the output of that by our credit performance.

So maybe digging in a little bit further on some of the slides, particularly the CRE office and Brian, thanks for giving the office reserve. People would stop bothering you about that now. So last quarter, you mentioned you took a couple of losses on some office credits. And as I said, you gave some updated disclosures. I know you've done some deep dives on the portfolio. So can you talk about what you're seeing specifically in the book? Does it differ at all geographically? And how are you managing through the stress? What strategies do you have in place to manage the stress?

We're looking at any of the stressed areas, whether it's office, health care, multifamily. We're looking at out 12 months now to seeing them work with clients. So it's not a surprise or aha when it actually comes to maturity. They're asking our clients if they need to put in more equity to rightsize it so they can basically cover their debt service coverage ratio from that perspective. We really are blessed to have a great client base that are supportive. When we have ones that are more investment-oriented, those are the ones that tend to not support the credit. So the ones that we tend to take charge-offs on and you see sales come out of our portfolio from that perspective.

You talked before about client selection. M&T talks a lot about its multi-generational client base that knows how to manage through cycles. Maybe just talk a little bit about how that is impacting the performance of the portfolio and how do you think that compares to what we're seeing across the rest of the industry?

Probably the best example is if you look at the criticized book that we have and the criticized book went up this past quarter, mainly due more to rates than actually business changes. It was more in the multifamily sector. Approximately 90% of that book is performing. So we have really strong collateral positions in those positions. So they may be on the criticized list for a while, but whether they have really lost potential. I think our history will speak for itself over time.

You talked about criticized increasing in multifamily. There isn't as much stress there, I think, as we're seeing in some other places, we're hearing more is working. Yes, we're hearing more and more about parts of the Southeast and Texas and the like. Maybe can you dig in a little bit more on multifamily? What are you seeing specifically within your portfolio? Are you -- is there anything that you're having to work through troubled credits? Or is it more just we're seeing migration without actual flowing to loss, which is what some others have highlighted their expectation in that sector?

The biggest impact is really the high level of interest rates for the prolonged period of time. And we have a pretty strict rule that if it's under [ 1.1 ] debt service coverage ratio. We put it into a watch list that gets under when it goes into the criticized list from that perspective. So we've very formula lag in how we tackle that. The forward curve right now does have rates coming down over time. If and when that happens, that will alleviate a fair amount, a majority of that book just by having less interest pressure from that perspective. We aren't really seeing any real rhyme or reason on any real issues specifically into those sectors overall.

Just a follow-up on the allowance. So it's reached 1.55%, including the 4.9% in total loans. And when I look at CRE, it's obviously much higher. What do we need to see -- I mean we've obviously seen over the last 4 or 5 quarters of reserves at building across the industry. What do you think we need to see for reserves to level off or actually start to utilize some of those reserves in areas like office? How far away from that do you think we are?

If you look at our nonperforming portfolio, our nonperforming portfolio actually came down a little bit this past quarter, that's not really growing dramatically. We do have some investors or borrowers that don't support their credits, you could see us do sales that could basically monetize maybe some of those allowances potentially over the next couple of quarters. But for the most part, we aren't seeing real pressure from an allowance perspective, I think allowing to basically be in the range, bounce up and down a little bit over the next couple of quarters from that perspective. But as the economy softens, we just have to be aware of what's going on and we'll do what we need to from an allowance perspective but we feel good of our allowance position today and we feel we have good coverages, good handle on our clients and books. I mean the credit team is working extremely hard to say on top of all the credits that we have and the positions that we're doing, and I think they're executing and performing well.

So switching to capital and regulation of the last few minutes. You highlight on the slide, CET1 is approaching 11%. You have the highest adjusted capital ratios in the industry, so not a bad place to be. You paused the buyback as we bid on clarity on the operating environment. Can you maybe just talk about how you're thinking about managing capital? What are the main signposts that you're waiting to see before you increase capital returns?

I think we just want to stay prudent with the high level of capital until we kind of get through the volatility that you have in the marketplace. The softening of the economy, still we have a large exposure in CRE, even though it's performing really well, we want to make sure we have a really strong performance and continue to execute from that perspective. I tell investors all the time we are still big believers in share repurchase that will happen. The capital is not going anywhere from that perspective. It's just a matter of we want to make sure we keep our capital strong through these challenging times. We're in the #1 position. We want to keep that position.

And we saw the SCB come down this year, but you're still running at levels well in excess of where I think you and I think the market expects you to run. What is the right amount of capital for M&T to hold over time?

All what goes on with Basel III and all that stuff. But typically, you want to operate with a cushion whatever the regulatory amount is over that. My guess is whatever threshold that we end up with. We'll probably have a cushion of maybe 100 to 150 basis points over that threshold ballpark. I mean we're talking with the Board and all that and try to get that there. But until we really know the rules or whatever is kind of an estimate, you don't run it too close to the edge there. So you always want to have some cushion and buffer from that perspective.

So obviously, there's been a handful of new regulations introduced Basel III endgame. You talked about the $12 billion of debt, and there's likely more to come. Can you maybe just talk about how M&T is position for these, how you plan on managing? And what else are you expecting in the pipeline in terms of regulation?

Yes, great question. So from a Basel III perspective, our -- the way we underwrite right now and the conservatism because of the loan-to-value ratios that we have, we believe right now that our -- from a credit perspective, our RWA might actually come down because we're really conservative on our LTVs from that perspective. So that would be interesting if that comes to fruition. The operational capital is impacting the whole industry. We were very fortunate and very fortuitous that we sold off our brokerage business as well as our CIT business off. So those were fee businesses that it didn't produce a fair amount of earnings for the amount of expenses and revenue that it provided. So I think those were really good. So while others are impacted, we're all impacted by it, we're impacted less because of that. So I think that we're in a really good position. If I had to guess, and we're still doing the analysis, and we probably will have some tweaks to Basel III. We'll be having maybe no impact to maybe a little bit of an impact on our capital ratios and our [indiscernible]. But it's something that we can really manage. It's not going to change our business model, how we execute. There are a lot of other people out there that are impacted a lot more than us. For us, we already have the capital. Whatever it comes out to be, I'm sure we have the capital for that in spades from that perspective. So we're going to continue to execute our model and be very successful in superior communities and customers. As far as other regulations, liquidity, interest rate risk, capital. We've already put in now targets for -- like our available-for-sale portfolio. We are going to put now in targets of -- we won't put a tangible common equity at risk. We didn't but we want to make sure that, that's now a target. For interest rate risk, we are having a dynamic beta in up and down scenario our [ Eve ] is more multifaceted in that, it's not just static. It actually moves in different directions. So we are really enhancing our interest rate risk. I talked about our improvements on liquidity. We are waiting for the regulators to change the rules moving ahead for what we think makes sense for M&T and how to run a company going forward.

Great. Well, unfortunately, we're out of time, but please join me in thanking M&T.