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

We have a special shout-out to the 50 or so U.S. corporates that came over here to present. I'm told we have record attendance at this event this year and kind of continue to build as we kind of come out of kind of the COVID kind of revamp. Continuing with the string of banks today, very pleased to have M&T Bank kicking it off with us this morning. From the company, we have Daryl Bible, Chief Financial Officer. And let's begin. We'll kick it off with a fireside chat. Daryl, thanks for making the trip.

Thanks, Jason. Congratulations on your record attendance.

Thank you. Appreciate it. Maybe the best place to start Daryl, you started M&T maybe almost a year ago. Obviously, a lot of big bank experience before that. Can we just talk a little bit about M&T's business model? What are some of the things that differentiates the company from others?

Yes. So I would tell you, it starts at the top, and Rene, our Chairman and CEO, he is a special person, from an ethical perspective, he's best-in-class, but he really cares and he cares about the communities that we serve, and he really does want to make sure that our communities where we're helping them grow and be prosper from that, really cares about our customers and making sure our customers meet their financial needs and also our colleagues. So I call it the 3Cs, so he is really good on caring. The other thing is, I would say, M&T's culture is really strong, very positive. To me, I tell people, I live in Western New York now. So that Buffalo is really in Midwest city in the state of New York, really strong ethical values. Everybody wants to do the right thing, and it's a great place to work. And we continue to attract a lot of top talent because people want to come work for a company that really does what it says.

Got it. And maybe expand on that since the event to last spring, a lot of talk about the role of regional banks and whether better have scale, too big to fail, national bank, cut type of model. You've been in the industry over 40 years, a lot of -- you worked at a couple of banks bigger than M&T. Maybe just talk about whether banks need to have scale to compete and win and just your thoughts around that?

So I -- the way I look at inorganic growth is are we going to be able to produce a return on that, that's going to benefit our shareholders longer term? Our business model, we believe at M&T is very unique when we were able to partner with and purchase peoples in New England that opened up 5 new states for us. And there's really not an M&T bank when you look at Massachusetts, Maine, Vermont, Rhode Island, New Hampshire. So we really go there, try to get involved in the community. We're one of the fewest banks, we may be the only bank, we give everybody, every employee in our company 40 hours of volunteer time a year to basically invest in the community and to really be engaged in that. And we really want the community to prosper. I'm a big believer that a bank is just a microcosm of a community that it serves. So we really want to be successful from that perspective. To do deals just to get more profitable, we're already really profitable. We've probably a mid-50s efficiency ratio. I'm not sure getting larger. We're going to improve upon that profitability. But we can maybe get a better return than what that target was that would help our shareholders and get more value is how I would probably look at it. But it's got to be a right fit culturally and from that and move forward.

Got it. And then I know Friday, you posted a slide deck, I think it was Page 7, kind of jumped out to me where you kind of talked about through the cycle return on tangible asset advantage over peers and look over 5, 10, 20 years or so. It looks like it translates in a 200 basis point plus ROTCE, if you kind of normalize for tangible common equity. Just how does management view profitability versus growth? And just maybe what does the border management? What are your targets around those? And then how do you think about generating long-term value for shareholders?

Yes. So I'd start with -- from a growth perspective, we're going to grow as much as the community will allow us to grow. We aren't going to widen our credit box. We're going to take advantage of the products and services that we have, and we're going to run our playbook and we're going to get the growth that the market gives us. So I wouldn't say we're going to be a high-growing company over the long term just because of the markets that we serve. But we will grow market share and I think be very effective from that. From a profitability perspective, we have really 6 businesses that all blend together to produce a really profitable business. We start -- I think one of the best things we have in our franchise is our deposit franchise. Our deposit franchise, we start with trying to get the operating account. If you look at it right now before the Fed started to pull money out of the system our DDA was over 42%, now we're down to low 30% range, but still one of the best in the marketplace. So we go to market to really get the operating account, which is really important. But we really want to serve our clients to make sure we get their full relationship and make them successful. At the end of the day, as long as we help our customers grow and meet their needs that helps us grow, and we do that, and it helps us get our profitability up there. And then eventually, we'll buy back a lot of stock. And that's really how we produce really strong returns over the long term.

Great. And then, I guess, since kind of 1Q earnings were reported, M&T has outperformed peers. So maybe just comment a little bit on the first quarter, and more importantly, just how you think the banks position for the rest of the year.

I think from a PPNR perspective, we have a lot of wind in our sales right now. If you look at net interest income, in January, we started with a guide of $6.8 billion to $6.7 billion, and that was between 3 cuts and 6 cuts. It's kind of how we bracket it up then. As a first quarter played out, we tended to have a pretty good result in our net interest income and margin. We had a little bit bigger balance sheet because we were carrying extra liquidity just from a conservative perspective because of the New York Community that is now flushed out of the company. So we're back to our normal size closer to $210 billion. But I think from a net interest income perspective, we said that net interest income should be at least $6.8 billion, we put a plus sign on that. It's probably $6.85 billion at least right now. So I think that's, I think, a positive and we'll just see how the year plays out. Our sensitivities are relatively neutral. So if the Fed raises, we don't think the Fed is going to raise rates, we might get maybe 1 basis point benefit in margin over 12 months. So it's not that significant. If Fed goes down 25 basis points, we probably lose 2 basis points over 12 months. So we're relatively neutral. What we have going on, on the balance sheet is a lot of positive repricing on the asset side. We have our consumer book, a lot of our peers decided to exit a lot of the indirect businesses. We stayed in those businesses, and we're able to attract really nice yields and nice spreads in those businesses such that we're getting really effective growth that's really helping us grow our yields and overall on the balance sheet. We're still continuing to shrink CRE as planned and able to offset that with C&I growth. But that consumer higher yield is really helping offset that mix change. On the deposit side, we've definitely seen deposit costs moderate some and we had a good result on that as well as we move forward. Fees were strong. Expenses were on track. So PPNR is in a really strong position right now.

Got it. So all right, net interest income was $6.7 billion to $6.8 billion for this year. Now you're saying $6.8 billion plus of earnings, now $6.85 billion at least. Maybe just talk a bit more about some of the drivers of that around earning assets and NIM and just how you kind of think the year plays out from here? And beyond kind of rates, what are some of the key drivers?

I think the biggest impact, I think most of banks would agree with this right now is what happens to the deposit franchise. And the disintermediation is probably the biggest impact, second biggest impact is pricing in deposits. From a disintermediation perspective, we've seen a definite slowdown of the migration of DDA going into sweeps. So that's really moderated. That has continued so far in the second quarter. So that's a very good positive sign for our company as well as for the industry from that perspective. Back in January, we noticed that some of our competitors were starting to drop rates. We joined in with that and the result of that in the first quarter is our interest-bearing deposits were up only 3 basis points. I take out the broker deposits. We were only up 1 basis point. So really almost no increase in interest-bearing deposits, which is a good sign as well from that. So I think the more that our deposit franchise is not that it's not competitive, it's just not frothy that it was coming out of Silicon Valley. We're still able to grow our customer deposits even with the rates coming down from that pressure. But that's the largest single impact that's driving the company from a net interest income perspective.

And I guess, around NII, you've talked about a net interest margin in the 3.50s for the year. I guess where do you think kind of NIM bottoms? And then when do you think we can kind of get back to that 3.6% to 3.9% range that your predecessor used to talk about?

Yes. So I would tell you that we believe in the first quarter, we were at 3.52%, that was probably the bottom. Definitely, I think we're in the mid-3.50s to high 3.50s throughout this year, may see a 3.60%, maybe, maybe not this year, but hopefully, that happens sometime next year if we continue to have positive trends as we move forward there. So I think there's a chance we get back into that at some point maybe in the next 12 to 18 months, while we'll get back in that range that you talk about. But a lot depends on the deposit pricing. Right now, we're able to still grow the balance sheet some, which is good, even though we're shrinking CRE, which is a positive as well. So I give all the credit to the teams out there. Kevin Pearson and Darren King, they're well running and their businesses. and our 6 businesses are operating probably as good as they've ever operated all at the same time right now from a profitability perspective.

Maybe just elaborate a bit in terms of if the Fed stays higher for longer, what impact does that have on NII and NIM?

I think rates staying where they are, even if they went down 100 or 200 basis points. As long as we have rates where you make money on the deposit franchise and on the loans franchise, it comes back to discipline, making sure you're getting your credit spreads on your assets and that you're basically pricing your deposits under your marginal funding curve. If you do that, that's really good. Right now, we have an inverted curve. If the curve would normalize. And I think they said in about 70% of the time, you have an upward sloping curve. We haven't seen that in the last year or so, but eventually that gets there. That's also a favorable environment. So I actually think it's a positive environment to be in that kind of mid-single-digit range of where we have in rates. And if we got an upward sloping curve, that would be really positive for the industry as well as M&T.

Got it. And then earlier, you talked about cost of interest-bearing deposits ex brokered was up only 1 basis point, certainly better than most banks. I think my coverage at signs down 3 basis points, if the results were up 1 basis point and you also talked about deposit growth. So just maybe talk about, elaborate more on the competition for deposits? And then when do you think kind of interest-bearing deposit rates could actually decline?

I would think the last Fed increase -- I don't want to jinx this, but last Fed increase was in July. My guess is that you could see some lower deposit costs second half of the year would be my guess. We'll see how that plays out. But the trend right now is people are moderating. When you looked in April, you're seeing even some of your monoline banks or your digital banks, they're starting to drop rates as well too. So as that kind of flushes through the system, that alleviates pressure and everybody will kind of accommodate that and move in that direction. For us, we start with getting the operating account. That's the most important thing to us when we go and try to get customers, we start with getting that. And we're very successful doing that. We aren't in the highest growth markets. But once we hit those operating accounts, we tend to not lose them very easily. We hold on to our customers and support them really well, which is really important.

Got it. And then this quarter, there was this kind of interesting phenomenon between kind of average deposit growth and pure end deposit growth. It's had a lot of banks given, I think, some of the calendar impact. So maybe just talk about that dynamic and just how you see the outlook for deposit balances for the end of the year?

Yes. I mean, deposits are seasonal. I mean, typically, you have an increase in deposits early in the year. Some of our businesses have that. You usually have deposits build up during tax time. And when you come to April, it usually dips because you pay your taxes. We also have some of our businesses that have escrows and escrows can be seasonal as well. We had 1 large deposit that came in, in the middle of the first quarter that ended up leaving in, I think, April-ish and towards the end of April. It was a large deposit that came from our Corporate Trust business. So we're going to have some lumpy funding flows up and down, but that's the kind of how that business makes money over time as supporting like M&A advisory activity, we hold on to those funds until they can be dispersed from that perspective. So we are good in that business. That's a business that's growing very nicely for us. We're investing in that business, and we think it's really good. We're actually international. We have offices here in London, Dublin and other parts of the continent in Europe. So it's a business that's growing with us. We're following where our sponsors do work and trying to help them meet their needs throughout the world.

Got it. And then maybe shift gears to loan growth. You're actually 1 of the few banks to actually grow in the first quarter. But maybe just talk about, I guess, what's driving your C&I growth, what industries on what subsectors? And then how are you able to grow while others aren't?

I honestly think a lot of people probably because of the AOCI impact were not what people would call RWA diet. And we saw that in the indirect businesses, a lot of people hold back in indirect auto. We stayed in that business and all of a sudden our margins are really nice in that space. So that's an example where you can kind of see where people exited and actually benefited us from a return perspective. From a C&I perspective, we had really good growth. It was from a geography perspective, we're investing heavily in New England, trying to put more resources there for all of our businesses, but we had C&I growth in Eastern Mass, which is good, but they also had growth in Baltimore, Philadelphia, Jersey, in the mother home ship, Western New York also grew nicely. So I think C&I was positive from a geography perspective. When you look at the businesses, I think you're seeing the complements of the People's acquisition. People's has had some nice commercial businesses that we're able to leverage and grow more. They had a corporate and institutional business that we have now put more resources behind that's growing, isolated fund banking, mortgage warehouse. All those came to us from People's, all those contributed to our growth. We also had increases in utilization in our dealer floor planning. That's more seasonal as the cars hit the lots early in the year. It spiked up. So that was good. Probably one of the best signs that we saw though was we had growth in middle market. Middle market has been pretty stagnant for the last year or 2. We actually saw some growth in middle market. And if our core customers are actually starting to make some investments then that bodes well for our marketplace and for our company.

Got it. And maybe focus on credit quality for a little bit. But it was interesting in the first quarter, we saw both criticized commercial real estate loans declined, commercial real estate net charge-offs declined. Maybe just talk about what drove that improvement in the first quarter? And then just how we kind of see this cycle playing out for commercial real estate for the rest of the year?

Yes. So when you look at our commercial real estate in the last year or so, the pieces that have had the most stress has been the office portfolio and the health care portfolio. That's where I'd say, over half of the losses have come from in that space. I think we've continued to see health care start to stabilize some. You go back maybe a year or so ago, they were having issues from an occupancy perspective, they were having issues from a staffing perspective, getting the right skilled nursing in place. Those seem to have gotten better. The place where they're still hurting some is on the reimbursement rates, are still lagging from that. But overall, I would say health care maybe isn't improving, but it's stabilizing from that perspective. So we still have a fair amount of loans in criticized, but it seems to be stabilizing, which is positive. On the office side, we've been very thorough continuing to shrink CRE. Office has been part of that as we can kind of go through that. It really starts with client selection. Client selection is huge for M&T. The vast majority of our clients that we bank in the CRE space are generational customers of M&T and owners of these properties. And they have been very supportive of owning and supporting these. And when the loans come up to maturity, we talked about that on the earnings call. We saw a fair amount of our customers, vast majority of them, either put more equity in, put more collateral in or more recourse, bring in other co-borrowers to kind of support those credits to help stabilize those credits and while some extensions to perform. So I think -- we don't want to say 1 quarter is a trend yet, but that was a positive sign. Obviously, if rates were to fall a little bit, that would take some pressure off as well. So we'll see how that plays out. But from a marketplace, we've seen when the yield curve shifts down, we've been able to actually place more of our borrowers in the permanent placing using the agencies or insurance companies that happened in December. Right now, you've seen some rates drop now in the last week. We are down to the December levels. But if that continues, you could see a real big pickup and a huge movement of placements would actually alleviate a lot of those that would be in the criticized space pretty quickly.