3 Things Holding Back M&T Bank, Do They Matter?

| About: M&T Bank (MTB)


Upfront compliance costs are holding back current earnings, but saving the bank from future fines.

The bank's low cost deposits ensure margins expand faster than the competition when rates start to rise.

Unlike a lot of other banks, M&T Bank's investment portfolio has very little interest rate risk.

Despite a few set-backs this past year, shareholders of M&T Bank Corporation (NYSE:MTB) are not phased, with shares continuing to float around their 52-week high of $125.90. The announced improvement in sequential quarterly earnings helped, but continued work on BSA/AML (Bank Secrecy Act / Anti-Money Laundering) compliance kept them well below what shareholders earned in the second quarter of last year ($2.55 per share).

Even so, it's hard to bet against a company that regularly grows tangible equity by 15% a year, and even more so when that company is a financial institution, as most banks in the current regulatory environment would cherish a 10% growth rate. On top of this, the bank's asset quality continues to shine, and management is in no way pressured to extend credit to projects with risk/reward metrics below its high standards.

With that, below I have outlined three gems hidden in the recent earnings update. All of which are capable of both protecting and growing future returns.

BSA/AML Compliance

It's never fun when Big Brother decides it wants access to your customers' information, but it's even less fun when that means that new reporting compliance will hold up an acquisition, and set you back a pretty penny to update procedures and educate employees. However, when the alternative is facing billion dollar fines, change all of a sudden starts to sound kind of nice.

There is no telling how much M&T will save on fines that never materialize, but there is one line item that could disappear when all of the work is over, and that number can be found in professional fees. A very large part of this quarter's YOY earnings decline can be attributed to an increase in professional services and salaries associated with BSA/AML activities that management expects to add up to $150 million this year. This, again, is expected to be non-recurring, so as soon as this project is done, alleviation of this earnings drain should improve M&T's efficiency ratio and bottom line.

Low Cost Deposits

It's funny how it works, but success breeds success and at M&T that means management's low-cost funding takes away pressure to commit funds to risky transactions. At $25.4 billion and growing, the bank's non-interest bearing deposit account now makes up 32% of all liabilities. Buffett boasts of Wells Fargo's (NYSE:WFC) low-cost structure, but even its interest free deposits only make up 21% of non-equity funding. Going forward, this is a huge advantage that the bank has waiting to deploy when rates start to rise.

Security Portfolio

Speaking of rates, management projects a 100 basis point uptick could add 4% to net interest income, but more importantly, the damage that the increase can inflict is minimized by the 4.3 year duration of the securities book. If you haven't noticed, debt portfolios at the banks are starting to get more attention because weak lending has built up dry-powder at virtually every major U.S. financial institution.

This sounds like a plus, but the reality is that this build-up has been invested in securities that mature anywhere between tomorrow and 30 years out. At 4.3 years, M&T's book is earning less, but its value is much more secure than the ones sitting on the books at Bank of America (NYSE:BAC) and Wells Fargo. Life is about trade-offs, but investors consistently find through its actions that M&T will not trade its low-risk policy for anything that isn't going to produce a sure win.

Bottom Line

M&T Bank's earnings had little to get excited about, but the plan for future returns looks sound, and investors continue to demonstrate that they are here for the long haul. Continue to look for professional service fees to decline, and margins to expand as soon as compliance costs and interest rates start to revert back to their means.

Disclosure: The author is long MTB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own MTB warrants.