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

The next fireside chat. Many of you know, M&T Bancorp, which is our 14th largest bank in the United States with assets of about $208 billion. The company's market cap is about $23 billion, and it currently is carrying a common equity Tier 1 ratio of 11%. To my immediate left is Daryl Bible, who is a familiar face to the RBC Financial Services conferences. He's currently the CFO of M&T, and he took over this position in June of '03.

'23.

I'm sorry, '23. The reason I said '03, Daryl and I were saying we're both dinosaurs. So that's part of it. And then for 15 years, he was the CFO of BB&T and Truist. So Daryl, welcome and thank you for joining us.

Happy to be here. Thank you for inviting us.

You're very welcome. Can you -- when you look at René's shareholder letter this year, he talked about M&T generating an ROTC of close to 18%, 17.6% and positive operating leverage. And you were one of the few banks to be able to generate positive EPS growth. When you look at it, how are you positioned as you go into 2024 after a year like you guys saw last year?

Yes. So I would tell you, 2023 was a record year for M&T. We had top profitability returns, return on assets, efficiency ratio, PPNR. So really, really strong year. Really positions us to be strong as we enter '24. We have a lot of momentum, I think, behind our backs. We know that our net interest margin is coming down some this year, and we've put that into our plan and forecast and guidance that we've given there. But when I look at the momentum that we have in our fee businesses and our lending, we have a lot of momentum as we go into '24. And really, '24 is a copy of what we did in '23 in that we are changing the mix of the balance sheet. And as we change the mix of the balance sheet, we're still shrinking our CRE, CRE is a little less than 25% of our total loans and will continue to decline throughout '24. And we're able to offset that growth with growth in our C&I businesses as well as some growth in the consumer loans. And you put that all together, we're still net growing a little bit of loan growth out there. We aren't pushing the marketplace. We're doing what the market will give us, and we're having success with that. On the fee side, I would say our trust businesses, ICS and wealth are off to a really positive start. They had a lot of momentum last year and continue to do really well. I think from our mortgage perspective, we continue to hire producers in residential mortgage and putting more assets and resources in our commercial mortgage. So if the Fed does lower rates and we get some leverage there, I think our mortgage revenue could actually continue to perform and perform better as the year plays out.

And speaking of rates with the Federal Reserve, when you think about the net interest margin, how do you think that behaves in an environment where maybe the Fed only cuts a couple of times, and it's more in the latter part of the year rather than in May or June?

Yes. On the earnings call in January, I said that where we are from a rates perspective is actually a really good environment for the industry. When I look at it, rates are high enough such that we can price our assets, our loans appropriately, we can price our deposits. Margins are made up of how much you make on both of those pieces together. So that it is a good place to have a good environment. The only thing is as the Fed maybe drops a couple of times, that might give us an upward sloping curve, which actually would be in a more favorable position for us. So I'm looking for the second half of '24 to actually be a really good year if the Fed moves down a couple times this year that we get more upward sloping curve, rates still relatively high. It really comes down discipline in how you price your -- the balance sheet and all that. And I think the industry and M&T, I think, will do really well in that type of environment.

We know for M&T and for other banks as well, there's a whole different mix of deposits and how they'll behave as rates come down, particularly with deposit betas. Can you share with us what you guys may envision in terms of rates get cut 50 or 75 basis points, how quickly will that filter through to your funding costs?

So if you look at the deposit betas cumulative that we had on the way up, excluding broker, we're probably around 50% plus or minus a little bit. If you look at the businesses, our highest rate businesses tend to be the commercial businesses and then the wealth businesses. We probably expect in first 3 to 4 moves down that those would have a downward beta in the 80% to 70% range. Business banking, our small business, is probably maybe more in the 50 basis point range. And the wealth only had a cumulative beta in the 30s, probably that probably in the 15% to 20% downward beta. But if you blend that all together, that's probably a 40% beta for us is kind of what I communicated in January. And I think that's what we have planned, working with the businesses out in the marketplace. The one thing to note, when we put our plans together in the fall, we anticipated deposits would be really competitive and all that. I think what I have seen and I think the industry has seen is much more rationality in the marketplace. And you're seeing people still being attractive trying to grow deposits, but we're doing it at a slightly lower promotional rate, which bodes well, I think, for the industry as well as M&T.

It's interesting you say that because you think about all the monies that have gone into the money market mutual fund industry in the cash there, that there isn't more scrambling for deposits. It sounds like, as you pointed out, it's rational pricing and people aren't panicking.

That's right. Yes. It's really good. It's kind of what you would think the environment should be. I think last spring, kind of scared people and it took a while for that to settle down. But I think people are back to running their businesses and being balanced to serving customers, but also making sure we're taking care of the shareholder.

Very good. One of the topics that everybody loves to talk about is New York City real estate.

Bank?

Particularly multifamily.

But it's good news, right?

Yes. Yes, very good news. So you were saying it was a minutiae and adding came in for $1 billion into New York Community and $2 a share, that's good. That's very good. That's great for the...

Yes, that's a good operator.

Yes. That's good. Yes. So when you take a look at M&T's New York City Metro New York office, why don't we start there first, the office market and the office presence that you have. Can you share with us some color on how that is operating? Or how is it proceeding?

Yes. So we're on our fourth year of shrinking CRE in our portfolio. If you look at where we were at the end of the year, if you look at multifamily, our permanent multifamily portfolio was $1.2 billion in New York. And if you look at the construction book that we have in New York with multifamily is about $1 billion. And when you look at multifamily, it's still a really good asset class. The piece that people are more concerned about is the rent control piece. And if you look at the percentage of rent control that we have, it's approximately 20% of what we have outstanding. So it's a very manageable number. And when the ones come off the construction book, they start at market prices there. So it's really over time is where you might get into trouble if you have to continue to increase rates there. But most of the projects have really good balance. So that I think long term, there will be a good long-term performance. When you get into the office side, we're down to under $700 million of office in New York now. I think we've done a good job exiting with our credits that we had in that space and will continue to come off and feel that we'll continue to make progress. We definitely know every property exactly what its exit strategy is, how it's going to perform and all that because we've spent a lot of time. I give a lot of credit to our Chief Credit Officer and his team and just staying on top of all these credits and having plans in place to address and make sure we get paid back and come through and would have minimal losses, I can go through this.

Coming back to the multifamily piece, when you think about the construction portfolio, when does that basically pay off when the properties are finished? Is it a 3-year, 2-year kind of time period that if you didn't make any new multifamily that, that would really run down quite a bit?

Yes, I think over the next couple of years, I think all the vast majority of the construction projects are performing very well and could -- they're on schedule. And I think over the next couple of years, that portfolio will continue to minimize and come down. But their ROAs and all that are performing really well. It's a good asset class. It's just pressure from higher rates is really what's causing that. And I'm not sure our 25 basis point reduction is going to do fair amount. But if the Fed goes down maybe 100 basis points, you could see some relief maybe on a lot of these marginal projects.

Yes. And when you come back to that rent-controlled piece that you said of the billion dollars of permanent mortgages and multifamily 20% is rent control. So it's $200 million on your balance sheet is quite -- appears to be quite manageable?

It is. Yes. It's -- you have to talk to all the analysts and investors all the time on all that. But our team is doing a great job managing through this, and I have all the confidence in the world we're going to get through with minimal losses and really do a good job. And really position how M&T is going to be positioned going forward. If you looked at our deck that we had last night that we put out, Page 5 is really the new segments that we have. We're really positioning our company to really have 3 diverse segments. We have a Commercial segment, Consumer segment and a Trust segment and really start to look at M&T across all those businesses and the diversification that we have as we move forward. And I think we'll be much more positive and much more diverse performance.

You touched on a moment ago that your credit team has done a good job in working with the commercial real estate borrowers. Can you walk through any examples of a loan comes up, it's fully leased or 90% leased building, but the value has come down because rates have gone up. How do you guys handle that? Because obviously, you're not going to push of...

So I'll start with our criticized book, which is $12.5 billion in size, 96% of those credits are paying as a grade. So we basically have great clients that are supporting these credits. So you start with client selection, but we were in meetings yesterday. And Kevin and Peter on our leadership team were talking about some of our borrowers and one of our borrowers put in $20 million to right-size a credit, another borrower put in $10 billion. So our borrowers are rightsizing these credits. They are giving us more recourse to right-size. A lot of these borrowers have multiple sources of income to support these properties and all that. So they're really stepping up to the plate, really doing a good job and if they support their credits, we're going to continue to support them as we move forward.

And a moment ago, you touched on about criticized loans or criticized assets. Can you walk us through how something becomes criticized? And then when you kind of look at your pipelines, do you have a sense when the criticized loans could peak?

So we'll see about that. So I would tell you when cash flow coverage ratio, it's under 1.1. It goes on our criticized list. That's a PD grade 11, 11 and 12s are our watch list, then 13 is when it gets on nonaccrual status. So we -- if you look at what we've done in the last quarter or so, we looked at 60% of all the CRE loans that we have on the books total. We looked at all the criticized loans. We looked at all the loans maturing in the next 12 months. We also looked at a lot of the construction loans, and we were able to basically move what we thought had to move up and down from a PD rating. If you look at all that, we actually had a decrease in office. We had some increases in multifamily, in retail and in health care were the sectors that actually had increases from a CRE perspective. So I think that the team has done a really good job keeping track of everything.

Yes. If the economy doesn't have a hard landing, is it fair to say criticized could peak in 2024?

Without committing to it, I would say that we probably will peak some time in '24 on criticized. Not 100% sure. We're finishing up the construction book. My guess is that we'll probably go up some from year-end to the end of first quarter. After that, it's -- the performance is actually really solid. What we're seeing come through, aren't seeing big losses come through on the portfolio. So I -- hopefully, we could peak sometime in '24. It's hard to exactly know when.

One of the real interesting characteristics of M&T, and you guys disclosed it in your slides is that though you may carry higher criticized loans, your loss given defaults or your net charge-offs have always been very low. Can you share with us how you guys are able to achieve that kind of result?

Most large banks, having worked at a couple in my past, really don't keep credits that are on the watch lists around for a whole lot of time. M&T takes a different approach in that they really support their customers and really stay with them. And by doing that, you have very loyal customers long term, which is really impactful and people will do anything to stay with you if you do that. I think what we're trying to do what we think is best for the shareholder as well as for the customer over time. You really don't have higher risk-weighted assets to get into nonaccrual. So you have a higher criticized book. But you are right, if you look at historically, we don't have a lot of losses. So when we run our models off a history doesn't generate a lot of charge-offs, which means it doesn't have a huge impact on our allowance numbers. And that's what you saw this past quarter.

Yes. Speaking of the allowance, maybe can you share with us how comfortable you are with the office reserves? When we just do a screen, everybody sees your number versus the Wells or PNC, maybe you can share some color with us?

Yes. So I don't really keep track of exactly what other people, what they disclose. But we're at 4.5%. We were a little bit higher, but we resolved one of our larger credits at the end of the fourth quarter. That's why it came down a little bit. But we feel very comfortable, that's what we need for the loss content that we have. I know others out there in the marketplace have higher percentages. I don't know if that's on all of their office properties or a subset of their office properties. So I think you need to look at that. But it's a very meaningful impact. If we wanted to double, so we want to go from 4.4 to 9, that's $200 million. That's not even an impact for a quarter for us from that perspective. But our models and the governance that we have in place, where we have to follow and we really don't have the losses to produce to support that.

Yes. And we were just talking about net charge-offs, particularly in real estate. When you look at it for the total company, I think you had about 33 basis points last year?

Well, it is from average, yes.

Yes. And maybe I think you're projecting 40 this year. When you look at the big picture, can you share with us some of the drivers for the levels that you're looking for?

Yes. So when we put our plan together, when I first saw 40, I thought that was going to be -- we've got higher losses in the CRE portfolio. And as they explained to me and what they came up with is we really haven't seen our consumer portfolio normalize since the Great Recession, to be honest with you, because COVID was a head fake that nothing really happened there with all the government support. So we think it's more normalization of the consumer portfolio as that goes through some stress periods or whatever, that just gets more normalized. I think that's actually the primary driver for the higher increase year-over-year. We think our losses in the commercial and CRE space will be there, it will probably be chunky. It's hard to know what you have each quarter. But we, right now, feel pretty good that 40 is the right number for us.

Yes. If we can then just walk back now that we're focused on some of the topical areas that people want to hear about. When you look at the macro environment and balance sheet growth for 2024, what are you guys thinking that what you can achieve and what kind of environment do you think 2024 could bring us?

I think 2024 is a year where I think the industry performs a lot better. I think M&T continues to perform. If you actually look at -- since 2017, when René was in charge, came in charge of M&T, we've had EPS growth of over 10% over that time period. So we are very focused at making sure that we continue to have a good track record of producing really good results that are supporting our customers, our communities, but also our shareholders long term. Drivers wise, I like the balance sheet. I like the margin. I think our fees have momentum. I don't get any expense questions right now. I'd tell you I have the most unselfish peers in my leadership team in that we all came up with disciplined budgets that allowed us to invest in 5 key areas in the company. And we basically guided to last year's expenses plus 2%, and it's working. Everybody is on track, achieving it from an expense perspective. We're putting significant money and we got 2 transformations going on, a finance transformation, commercial transformation. Both of those are game changers in how we operate today and how we go to market. Those will be done probably in the next year or 2. We're making significant more investments in our digital products, treasury management products and in our data and analytics areas, which are areas we think are key and really important. And that's really the bulk of where we're putting all these extra funds to try to make us really get better in those areas. And I think we're on a good path to accomplish that.

When you talk to your guys on the front lines, and they're talking to your clients, your customers. What are the clients and customers, small business, large business, what are they feeling or seeing today when you guys talk to them about their loan demands and their growth?

I actually try to go out in the marketplace every quarter, try to get a little bit one foot into reality a little bit and talk to them and had the opportunity to go out in Central Pennsylvania and just talking to clients there. And one of them ran a trucking company, trucking has been under stress for the last year or so. He basically says his business is operating. He's making money, but not as much as he used to making, but the clients just are not pushing through as much volume as what. They used to move 3 pallets a week. They're only moving 1 or 2 pallets or whatever. So it's just down volume. Talked to an owner of a very large convenience store along the East Coast. And he says he's performing well again, but his customers are coming in and are spending about 20% or 30% less than they would typically. If they've spent $20, they're spending $14 instead now. So people are just tightening their belts a little bit is kind of what I'd say most of our customers are saying. They're a little bit more cautious. Nothing to worry that we're going into a recession, but it's not real robust growth what we're seeing.

M&T over the years has had a very robust dealer floor plan business. Any color or insights what's going on with the dealer floor plan business?

Yes. So we are really big in that space. From an auto floor planning perspective, we're seeing utilizations come up that actually, as we saw it in the fourth quarter, we're seeing that continue in the first quarter. So we're having growth in utilization in that sector. We also are in the RV and in some marine floor planning there. And I'd say if you look at the RV floor planning, they're coming off a period where they had a lot of product in '22 that didn't really sell. So they've had to flush that through their inventory. Most of the dealers are through that pain now, and they're back to '23 and now '24. So they're getting more grounded from that perspective. And then the marine space overall, I think, is performing quite well. They've had some good boat shows earlier this year and had good output out of that. So I think those businesses seem to be performing relatively well.

Very good. Just pivoting back for a minute on commercial real estate. You mentioned how you brought it down as a percentage of total loans. Is there a targeted level where you want to bring that to? And do you get there more from just growing the other portfolios and commercial real estate dollar-wise may not come down that much. But percentage-wise, it could decline?

Okay. So in René's shareholder letter, he talked about a lot of things in there. One of it was our continued reduction of CRE. And in there, he talks about you go back 3 years ago, we started our reduction in CRE as a ratio that you're aware of the CRE ratio that's over your allowance in CET1. So we were at 260% back in 2019. So if you look at where we ended in '23, we were at 183%. Based upon our planned projections, we'll probably end up in the 160s, maybe a little bit better than that from that perspective. When you look at where everybody in our peer group operates, we're now in the neighborhood of close to where they are. Most of them are probably between 100% to 150%. It's kind of where that clump is. So we're in that radar's range where that is. It doesn't mean we're going to exit the CRE, we're doing more off balance sheet. But I think at some point, we're going to get to a point where we grow CRE and we grow C&I and consumer. And then you really see the revenue power of the company really start to flourish and really come to life, with that where we are growing that. And if you look at our mix today, we're 43% C&I, 33% consumer and 25%. Maybe you end up at 45%, 35% and 20%. It's kind of the mix that you have and then you just try to grow portfolios proportionately as you move forward like that.

Got it. And if we go to the right side of the balance sheet and look at deposit growth, I think the outlook is for average deposit growth implies flat to 2% in year-over-year deposit growth. When you think of the different types of deposits, where do you think the growth comes from?

One of the core learnings when I first came here was how well we produce checking and operating accounts. I was shocked at how well -- one, how large a percentage we had, but our attrition rates are best in class. So we are in high-growth markets. But once we get customers in, it's hard to lose those clients from that perspective. That is core to how we go to market. In every business that we operate, we go get the operating account. All of the sales teams are trained and incented to do that. That will be core and very, very important. I think the other thing we're really focused on is always asking for all the business when we talk to customers, right? So if you're talking to them about a loan trying to get a deposit or try to get some fee service or whatever. So it's always the product they're trying to be on. And we're asked now not for just operating accounts, but also some investment funds or whatever to be added to it, so we can be competitive and continue to add that mix. So I feel good that we have a lot of energy and a lot of success in how we go to market and do that. And Darren running the Consumer Bank is an awesome operator. Kevin and Peter on the commercial side, they are doing a great. Those people really know how to run really good businesses. Jen running our trust business is really strong. So those leaders, I believe, will make a huge difference as we continue to execute moving forward.

Got it. When you take a look at your -- actually, one other question. When you look at the noninterest-bearing deposits, have you guys seen like some of your peers have pointed out in this conference that the migration patterns have really started to diminish since the Fed last raised rates on July of last year.

I mentioned that in the earnings call, and there were still some disintermediation that we saw. But seasonally, you're always lower in January. That's just for the industry and we did a little better than the industry trends and how much we declined. I think we're seeing the pickup now as we get to March time frame. So I think that mix, I think, will probably continue to stabilize and hopefully stop that disintermediation maybe in the next quarter or 2 would be my guess from that perspective. I think on the consumer side, as long as rates are higher, you're probably still going to see a little increase in the CD book. I think we and many others are shortening the maturities on the promotions and all that, trying to push it into closer to 6 months rather than where we were last year, 12 to 18 months, just trying to shorten that to position us more so when the Fed maybe at some point, starts to lower rates.

Yes. In fact, when we think about what the Fed is going to do, I think in January, you guys gave the range of NII of $6.7 billion to $6.8 billion in your slide deck last night updated us on that. Can you remind us what kind of interest rate cut scenario are you using for that kind of guide?

Yes. So when we released earnings in January, we were on day 4, so we got to hear a couple of calls before that. And there was no consistent. I think some people were talking about 3 cuts, some were talking about 6 cuts. So what we gave, we decided to just give the analysts both. So the $6.8 billion was 3 cuts. That's probably looking more like reality now. But the $6.7 billion was more like 6 cuts from that perspective. But we feel good that we're on track to get $6.8 billion at a minimum, maybe do a little better than that as the year plays out, just trying to be opportunistic from that perspective. What we're seeing now with the backup in rates and the hedging that we are doing is we're working on hedging now in '25 because we're pretty well balanced. If you look at the slides that we put out last night there but the rates are actually higher than what we thought they would be in our plan from that perspective. That actually bodes well for '25 as well as we continue to manage the portfolio out a year ahead from what we're seeing right now.

Got it. And the net interest margin, when do you think kind of bottom? And if you go back to that long-term range of 3.60% to 3.90% is that a realistic goal or a target?

So I adjust that a little bit because just because we're carrying more liquidity on the balance sheet, that's real. So I would probably shave off 10 basis points and doing a quote adjusted long term of 3.50% to 3.80%. I think our hope right now is that we will be in the 3.50s for a couple of quarters and hopefully see how the second half of the year plays out and maybe start to increase as the year end comes and then start '25 at a much better spot.

Got it. I know we're running out of time here, but maybe the last question or two. Your views on what the year looks like or the quarter looks like for fee income growth and expense growth. Again, I know the slides were out last night, but it would be helpful...

Yes. Yes. Our fees are on track. I think we feel good about that. Typically, our fees go down a little bit. We get one large fee from one of our clients every year. That will come in as expected from that perspective. So that I think is pretty much where it needs to be. Expense-wise, our expenses are in check. People are doing really well. We're making a lot of investments. People are following their plans and people that aren't on their plans have, I call, go-to-green-plans to get back on plan and all that. So people are working really well, working hard. And I have all the confidence in the world we'll have a really strong, successful '24 and beyond.

Yes. And then lastly, M&T has had a great history of managing their capital very effectively, returning excess capital to shareholders, buyback is on pause until we get the Basel III end game as well as we got the DFAST CCAR scenarios. Any color you'd like to share with us on what you see there?

What I would just tell investors is that we still believe buyback is a core part of our capital distribution. The capital is not going anywhere. We will distribute capital. We will buy back shares, I have no doubt about that. We're going to do it when we think the time is right, when it makes sense for us and all of our constituencies. But I think we're on a good track and a good visibility. That will happen at some point in the future. And hopefully sooner than not, but we'll see how it plays out.

Well, with that, can you join me in a round of applause, thanking Daryl for coming up here.

Thank you.