M&T Bank (NYSE:Mountain biking) is a regional bank based in Buffalo, New York, with more than 1,000 branches across the eastern United States, from Maine to Northern Virginia. The bank operates as a universal bank, offering retail banking, commercial banking and investment banking services.
Through these activities, M&T reported revenue of $3.09 billion in the third quarter of 2023, along with net income of $688.70 million and free cash flow of $1.11 billion, or an increase of 52.71% year-on-year, due to increased operating cash flow.
A key aspect of M&T’s value proposition remains its highly inelastic retail consumer base, which supports and reduces M&T’s retention costs and promotes organic growth as consumer families and their wealth increase. The company achieves this primarily through a focus on customer engagement, ensuring multilingual and multicultural relationships with customers, engaging in community projects, supporting businesses, and overall achieving top rankings for small businesses and businesses. retail banking.
This customer-focused strategy, combined with moderate undervaluation and the company’s prudent risk management, leads me to rate M&T Bank a “buy.”
Valuation and Finance
Past year performance
During the TTM period, M&T’s stock fell 5.77% and performed middling among the regional banking sector, represented by the SPDR S&P Regional Banking ETF (CREATE) – down 11.08% – and the broader market, represented by the S&P 500 (TO SPY) – up 23.96%.
Although the underperformance of M&T and the regional banking sector as a whole relative to the market can be explained by the bank failures earlier this year, I believe that the superior price performance of M&T relative to banks regional results demonstrates the overall quality of the company and its commitment to risk mitigation, therefore a lower beta.
Regional banks are generally homogenous in their core operations, with the only differentiators being the region itself, the composition of the target population, and the bank’s risk appetite. As such, I chose to compare M&T to the other banks listed under the “Peers” tab of Seeking Alpha for M&T Bank. This group includes Huntington Bancshares, a Midwest-focused company based in Columbus, Ohio (HBAN), the Southern-focused Regions Financial Corporation based in Birmingham, Alabama (FR), Citizens Financial Group, based in Providence and Rhode Island, focused on New England and the East Coast (CFG), and Pasadena, California-based East West Bancorp, focused on the Chinese-American community (EWBC).
As demonstrated above, M&T had the second-best performance over the past year in the peer group. Despite this outperformance, I believe M&T’s operating model allows them greater growth. An example of this room for growth is the superior value based on M&T’s multiples, in addition to greater underlying fiscal strength.
For example, M&T maintains the lowest and second-lowest forward P/E ratio in the group, in addition to the second-lowest PEG ratio. In terms of growth, M&T doesn’t stand out from the pack, but it’s not a slouch either.
The company also maintains a superior balance sheet position compared to its peers, with the second lowest debt-to-equity ratio and by far the highest book value per share.
M&T also pays a respectable dividend of 3.76%, with a conservative payout ratio of 27.57%.
According to my discounted cash flow assessment, in its base case scenario, M&T’s net present value is $153.38, meaning that at its current price of $137.32, the stock is undervalued d ‘around 10 %.
My model, calculated over 5 years without built-in perpetual growth, assumes a discount rate of 8%, reflecting M&T Bank’s low implied volatility and light debt cap structure. Additionally, to be conservative, I estimated a 5-year forward revenue growth rate of 6%, despite M&T’s 5-year arithmetic average of 16.95%, reflecting the potential for more revenue growth weak given the tighter monetary and macroprudential environments.
Alpha Spread’s multiples-driven relative valuation tool more than supports my positive view on the stock, estimating a 23% undervaluation, with a relative value of $178.52.
Therefore, averaging my NPV and the relative value of Alpha Spread, the fair value of M&T Bank is $165.95, approximately 16.5% undervaluation.
M&T’s Customer Focus and Fiscal Prudence Drive Value Proposition
As mentioned previously, consumer relationships and loyalty are at the heart of M&T’s underlying strategy. This focus on individual relationships comes with a smaller deposit base per person, which reduces third-party risk, particularly with a majority of deposits being insured/guaranteed. Additionally, this granularity supports a more diversified deposit base, thereby reducing implied risk. Additionally, M&T can transform low-value relationships into higher-value relationships as customers mature. But above all, one of M&T’s key value drivers remains its liquidity profile, bolstered by stable but granular deposits.
M&T also demonstrates disproportionate geographic coverage with well-optimized management of real estate expenses. The company prioritizes high-density locations, with the third highest number of branches of any bank in the Northeast, the highest of any non-large-cap bank.
Consistent with M&T’s conservative growth theme, the company has largely focused on reducing its sensitivity to interest rate volatility, by approximately 2% effects on increased and reduced interest rate positions at an average of less than half that figure. While I highlight changing interest rates as one of the biggest risks for M&T, the company is responding to it proactively.
Wall Street Consensus
Analysts generally echo my positive view on M&T, estimating a 1-year average price target of $149.17, an increase of 8.82%.
However, at the projected minimum price target level, analysts expect a decline of 11.73% to $121.00, which is not that negative considering the moves of some regional banks over the past years .
Risks and challenges
Interest rate volatility can squeeze margins and increase scale
Although, as noted when managing the company’s interest rate risk, M&T has reduced its sensitivity associated with interest rate movements, the company still expects net interest income of -193 million dollars if rates fall 1%, which seems increasingly likely by spring 2024. in my opinion. Even if rates remain the same or increase, the company will face reduced demand for credit products in the long term.
Increased regulatory pressures could dampen growth
Although M&T remains more insulated from the pressures faced by other regional banks due to its conservative nature, M&T is always aware of potential regulations or rules that governments may impose on smaller banks to reduce economic risks. These regulations could further hamper large-scale growth and the ability of banks like M&T to operate with flexibility and greater efficiency.
Looking ahead, M&T is a conservative bank whose undervaluation, customer focus and risk management support gradual price appreciation as well as strong earnings.