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The net interest income of MTB declined 1.70% compared to its previous quarter, with the decline being attributed to two fewer days in the previous quarter. The decline in the net interest income of its peers was as follows: PNC was down 1.44%, USB was down 2.66%, and KEY was down 2.97%. The net interest income of MTB increased 5.75% year over year compared to PNC, USB, and KEY.
The non-interest income of the bank dropped 4.48% compared to the previous quarter. The decrease is attributed to a decline in the mortgage banking revenues. Non-interest income rose by 14.91%, year over year, higher than PNC, USB, and KEY.
The non-interest expense of MTB increased 1.52% compared to its previous quarter, Q4 2012, while other banks saw a decline in their non-interest expense in the same period. If year-over-year percentage decline is taken into account, there was a marginal decline in the non-interest expense -- better than all other banks taken as the company's peer group.
Credit quality improved as was reflected in the 23.90% quarter-over-quarter decline in net charge-offs, the highest decline when compared to its peer group. The year-over-year decline was 17.18%, which is also a reflection of the improving credit quality of MTB. A sharp decline in the provision for credit losses adds further testimony to the improvement in the credit quality of the bank. The provision for credit losses declined 22.45% quarter over quarter, better than the decrease registered by both USB and KEY of -25.79% and 0.87%, respectively. PNC posted a decline of 25.79% during the same period. The decline in provision was 22.45% year over year, better than the peer group.
The total deposits of the bank increased marginally to $63.681 billion in Q1 2013 from $63.506 billion in Q4 2012; however, they showed an increase of 8.3% year over year from $58.795 billion in Q1 2012. Only USB managed to increase its total deposits to $245.018 billion in Q1 2013 from $243.847 billion in Q4 2012; the remaining two banks (PNC and KEY) met the same fate as MTB.
The non-performing loan ratio of MTB is 1.6%, the second-highest after PNC, whose non-performing loans stand at 1.83%. BBT and USB have non-performing loan ratios of 1.12% and 1.35%, respectively. Total nonperforming assets of MTB increased 0.28% quarter over quarter, while USB and KEY saw a decline in their total nonperforming assets by 9.92% and 4.08%, respectively, during the same period. PNC saw an increase of 3.51% quarter over quarter in total nonperforming assets.
The nonperforming assets of MTB declined 4.73% year over year, the lowest when compared to the peer group. USB registered the highest decline of 30.34% year over year in the total nonperforming assets. PNC and KEY posted year-over-year declines of 9.95% and 8.08%, respectively, in total nonperforming assets.
Despite recording an increase in its non-performing loans portfolio for three consecutive quarters, MTB lowered its loan loss reserves. This trend, in the future, is likely to force the bank to use its earnings to keep up with the increasing losses. The loan-to-deposit ratio increased to 103.52% in Q1 2013 from 95.38% in Q4 2012. The loan-to-deposit ratio of MTB is highest compared to its peer group. Other banks saw only marginal growth in their loan-to-deposits ratio; PNC's loan-to-deposit ratio increased to 88.14% in Q1 2013 compared to 87.19% in Q4 2012, while USB's loan-to-deposit ratio increased to 90.78% in Q1 2013 compared to 90.33% in Q4 2012.
The return on average assets of MTB declined quarter over quarter to 1.36% in Q1 2013 from 1.45% in Q4 2012, but has increased when compared to Q1 2012. The return on average assets of all the banks in the peer group remained relatively stable with marginal improvement.
Though MTB registered a decline in return on equity to 11.10% in Q1 2013 from 12.10% in Q4 2012, the figure still stands out at above 10%, which is solid after the financial crash. PNC saw an increase in its return on average equity to 10.68% in Q1 2013 from 7.48% in Q4 2012.
The net interest margin remains relatively stable for all the banks making up the peer group. MTB's first-quarter margin was 3.71% close to net interest margin of PNC of 3.81% in Q1 2013. Non-interest income to total revenue for MTB declined to 39.75% in Q1 2013 from 40.44% in Q4 2012, while it increased from 37.78% in Q1 2012. All the banks followed the same trend except USB, which has experienced a decline in the current quarter to 44.42%, from 45.56% in Q4 2012 and 45.43% in Q1 2012.
I have calculated the efficiency ratio as non-interest expense divided by total revenue. MTB's efficiency ratio was 58.37% in the first quarter compared to 55.87% in the previous quarter. PNC and KEY have efficiency ratios of 60.56% and 67.16%, respectively.
The diluted earnings per share of MTB fell to $1.98 in Q1 2013 from $2.16 in Q4 2012. MTB has the highest earnings per share as compared to other banks in the peer group.
The Tier 1 common ratio of MTB stood at 7.93% in Q1 2013 and 7.57% in Q4 2012. KEY recorded a Tier 1 common ratio of 11.39% in Q1 2013.
Reasons to Buy
One must not forget that MTB has beaten estimates consistently and posted strong earnings, even against the backdrop of a weak economy. The net interest income of MTB has risen for all the years since 2008. The net interest income has grown at a CAGR of 6% over the last five years ended December 2012. MTB sits on a robust liquidity position, benefiting from market dislocation, especially in up-market New York. The cost of deposits fell to 0.22%, or 4 bps, from Q4 2012, and total cost of funding declined 0.64%, or 3 bps.
MTB had proposed to take over Hudson City Bancorp (HCBK) in August 2012 for $3.7 billion. As per the terms, MTB would take over the existing 135 branch offices scattered across New Jersey, New York, and Connecticut. The buyout is expected to be completed between Aug. 27, 2013, and Jan. 31, 2014.
The acquisition is expected to expand MTB's franchise in the eastern portion of the U.S., making MTP the fourth-largest depositor in New Jersey, a place MTB has not penetrated much. The deal would enhance the EPS and capital ratio of the bank. HCBK would help provide growth in the middle market, small business, and commercial real estate to MTB.
Reasons to Sell
MTB has its loan portfolio concentrated in commercial real estate loans; the company expects the margin pressure to persist through 2013, riding on the back of pressurized average asset yields. The company's results were negatively affected by the series of new regulations in 2011 and in 2012 that led to lower fee income and higher assessments by the Federal Deposit Insurance Corporation (FDIC). The trend is expected to continue with increased costs and lower fee income and stringent capital norms, which would then lower the company's flexibility.
Despite a challenging environment, the company's growth outlook remains strong given the improving capital ratios.