I've noticed some analysts pointing to similarities between 2008 and the current banking crisis. Despite yesterday’s news that First Citizens BancShares (FCNCA, Financial) is buying part of Silicon Valley Bank (SIVB, Financial), it is still hard to disagree when looking at the balance sheets of all banks in general. Total deposits exceed liquid investments overall because income is mostly made on loans. And, if you factor in the off balance sheet exposure, you start scratching your head on how these numbers are supposed to add up.
No matter how you try to sugar-coat it, just about every single bank would have trouble if what happened at Silicon Valley Bank were happening to them. They just don't have enough cash on hand to pay everyone if a deposit run occurs. That said, when it comes to avoiding a deposit run, scale matters, perception matters and brand matters, which brings me to M&T Bank (MTB, Financial), an incredible regional bank with a $19.31 billion market cap trading at a forward price-earnings ratio of 6.97 with a forward dividend yield of 4.33%.
About M&T Bank
Founded in 1856, M&T Bank is a regional bank with operations throughout the northeast U.S. The bank's main stronghold is commercial real estate, with much of the rest of its business comprising other commercial (as opposed to retail) operations. It does have some retail operations as well and a history of good management, good underwriting and deep on-the-ground relationships. This makes M&T both a solid operator and an unlikely target for failure, and with a large exposure to commercial real estate, this puts it in a contrarian position when that segment of the market rebounds.
Last April, M&T Bank acquired People's United Bank, significantly broadening its geographic presence in the northeast, primarily extending into Connecticut, Massachusetts and the boroughs of New York City. Today, the combined bank has more than 22,000 employees and over 1,000 locations. This acquisition also enhanced the bank's equipment financing-related products. The pricing of the deal and soon to be realized cost savings should allow the bank to follow up with cross-selling and attracting new retail customers. Overall, I believe this acquisition will likely continue to boost top and bottom line performance.
Managing risk
Since October, shares of M&T Bank are down almost 40%, and they are down 18% from the start of 2023. However, while some banks mismanaged interest rate risk, it looks like M&T Bank did the opposite and prepared well for the rising interest rates.
Chairman and CEO Rene Jones wrote the following in 2021:
"With a lack of loan demand during the year, many peers chose to invest a greater proportion of their excess cash into investment securities. It is notable that during the year, we chose to avoid following suit given the historically low rates of interest that did not seem to compensate us for the risk that rates might rise in the future. In essence, we decided it was better to hold our fire. A hypothetical $10 billion invested in a three-year U.S. Treasury bond yielding 16 basis points at the start of 2021 would have earned $3 million in incremental interest income during the year; however, that would have been accompanied by a $234 million decline in market value and thus a reduction in equity, as rates came off their lows. We made this conscious decision to avoid risking our shareholders' equity and, ultimately, we believe that they will appreciate that patience."
In his letter from last week, Jones reaffirmed the benefits of this foresighted strategic position:
"As 2022 began, M&T and our peers were still dealing with the impact of the government stimulus, and bank balance sheets were flush with large cash balances with limited options to invest. Loan demand was tepid and yields on investment securities were at historically low levels. As noted last year, we chose to be patient in investing the cash until rates offered a better return and there was less risk to our shareholders' equity. As yields on investment securities and loans rose to levels meaningfully above those available in 2021, we reduced our interest-bearing cash balance by 40 percent to just under $25 billion at the end of last year, funding loan growth and purchasing investment securities. The timing of these actions allowed us to benefit from rising rates over the course of the year, simultaneously reducing the potential negative impacts of future rate declines."
Financials and valuation
As far as the income statement is concerned, M&T Bank remains a slow and steady growth story. Total revenue has risen from $4.3 billion to over $7.6 billion in the last decade with net income increasing from $1.1 billion to just shy of $2 billion, maintaining a relatively constant 26% net profit margin.
On the balance sheet, M&T Bank has just over $50 billion in total investments, $37 billion in investment securities and net loans of $129 billion against deposits of $162 billion. Most banks do not need to worry about this since customers use the bank and are unlikely to withdraw all their cash as long as they trust the bank. M&T Bank is a bank people trust. Furthermore, M&T Bank has done a good job building its book value, which has grown from $79.84 to $137.69 per share since 2013. In other words, the stock currently trading at 80% book value and under seven times forward earnings. It’s easy to see the bargain price.
Out of 15 analysts surveyed by Morningstar (MORN, Financial), the estimated non-GAAP earnings per share for M&T Bank in 2023 is $18. If that number holds steady in the years to come, the bank could be on track to reach book earnings north of $180 per share in the next decade.
As this banking crisis comes to an end, the future remains uncertain for many banks. However, M&T Bank not only has a long history of success, it is managed by a great CEO with the foresight to allocate capital appropriately in the face of mounting risks. If the bank earns $18 per share in 2023, keeps up the same level of earnings or higher over the next decade and trades at historical multiples, then at some point, I expect the bank could be trading above $200 a share. Regardless of what happens in the short term, I believe it is only a matter of time before the share price of M&T Bank rises again.
