M&T Bank Has Promising Growth Prospects And A Cheap Valuation

Summary

• MTB has two major growth catalysts in place.
• MTB is offering a 3.1% dividend yield, with ample room for meaningful dividend hikes in the upcoming years.
• MTB is trading at a price-to-earnings ratio of only 11.5.

M. Suhail/iStock Editorial via Getty Images

The S&P 500 has more than doubled off its bottom in 2020 and has posted 69 new all-time highs in the last 12 months. As a result, investors now struggle to identify cheaply valued stocks. M&T Bank (NYSE:MTB) is a bright exception. It has promising growth prospects, it is offering an attractive dividend yield of 3.1% and it is cheaply valued. Therefore, the stock is likely to highly reward those who purchase it around its current price.

Business overview

M&T Bank is a regional bank, which has 695 branches in New York, Maryland, Pennsylvania, Delaware, Connecticut and West Virginia.

In 2020, the company was hurt by the coronavirus crisis, which caused a fierce recession and led the bank to greatly increase its provisions for loan losses. It thus incurred a 29% decrease in its earnings per share.

However, thanks to the unprecedented fiscal stimulus packages offered by the government and the massive vaccine rollout, the economy is recovering strongly from the pandemic. As a result, the actual loan losses have turned out to be far lower than those booked last year and hence the bank has nearly returned to its pre-pandemic profitability.

The positive business momentum was confirmed in the latest earnings report of M&T Bank. Thanks to the recovery of the economy and the resultant reversal of a major portion of the loan loss provisions of the prior year's quarter, the company grew its earnings per share 34%, from $2.75 to $3.69. It is thus on track to grow its earnings per share 34% in 2021, from $9.99 to $13.38, which is only 5% below the pre-pandemic record level of $14.12.

Growth prospects

M&T Bank has consistently grown its earnings per share. More precisely, it has grown its bottom line every year in the last decade, except for 2014 and 2020. On average, it has compounded its earnings per share at an 8.2% annual rate over the last decade.

Even better, the company has two major growth catalysts ahead. First of all, after 12 years of suppressed interest rates, the Fed is determined to begin raising interest rates in mid-2022. Higher interest rates provide a strong tailwind to banks, as they enhance the net interest margin, i.e., the difference between the interest charged on loans and the interest paid on deposits.

The economy has overheated lately, as evidenced by the steep increase in inflation. Consequently, the Fed is likely to deliver on its promise and raise interest rates at some point in 2022 in order to keep the economic growth under control. M&T Bank will greatly benefit in such a case.

M&T Bank also has another growth catalyst in place, namely its pending acquisition of People's United Financial (PBCT). As per the terms of the deal, the shareholders of People's United Financial will receive 0.118 shares of M&T Bank for each share they own and they will own only 28% of the combined company. The combined bank will be covering more than 20% of the U.S. population and more than 25% of the U.S. GDP.

People's United Financial is an exceptionally well-managed bank, which has consistently grown its earnings and has repeatedly proved resilient to recessions. To be sure, in 2020, which was marked by the fierce recession caused by the pandemic, People's United Financial posted a benign 8% decrease in its earnings per share. Even better, the bank is on track to post record earnings per share in 2021 while it also has an exceptional performance record, with 29 consecutive years of dividend growth.

It is also important to note that People's United Financial has more than 400 branches in the Northeast and has a market capitalization of $7.6 billion, which is 38% of the current market capitalization of M&T Bank. Therefore, it is evident that this will be a major acquisition for M&T Bank. Overall, the acquisition of People's United Financial is likely to prove a major growth driver for M&T Bank thanks to the high quality of the acquired bank and its size.

Dividend

In the Great Recession, which was the worst financial crisis of the last 80 years, most banks cut their dividends but M&T Bank maintained its dividend. On the other hand, the company paid the same dividend for 8 consecutive years, from 2008 to 2016. Nevertheless, M&T Bank has resumed growing its dividend in the last four years.

Moreover, the stock is currently offering a 3.1% dividend yield. While this yield may not seem exciting on the surface, it is 2.5 times the current dividend yield of the S&P 500 and hence it should be attractive for income-oriented investors. Given also the healthy payout ratio of 32% and the promising growth prospects of M&T Bank, there is ample room for meaningful dividend raises in the upcoming years. It is also worth noting that M&T Bank recently raised its dividend by 9.1%. This is a testament to the ample room for dividend hikes and the confidence of management in the business outlook of the bank.

Valuation

M&T Bank is currently trading at a price-to-earnings ratio of only 11.5. This is much lower than the historical 10-year average price-to-earnings ratio of 14.1 of the stock. As soon as interest rates begin to rise and the market appreciates the benefits from the aforementioned acquisition, the stock is likely to revert towards its historical valuation level. In such a case, the stock will enjoy a 23% tailwind (=14.1/11.5 -1) merely from the normalization of its valuation.

Risks

If the coronavirus mutates significantly and evades the vaccines, it may cause a significant setback to the economy. In the worst-case scenario, there will be another round of lockdowns, which will cause an increase in the loan loss provisions of M&T Bank.

However, vaccine producers have stated that they can easily adjust their vaccines for potential mutations, within just a few months. Moreover, now that nearly 60% of global population has received at least one dose of a vaccine, the odds of the above scenario have decreased. Even if a significant mutation shows up, vaccines will still offer some protection; they will not be useless.

Furthermore, most governments have shown reluctance to impose new lockdowns. To cut a long story short, it is extremely unlikely that we experience a worse year than 2020 in reference to the pandemic. Even in 2020, M&T Bank incurred a 29% decrease in its earnings per share but it remained highly profitable and endured the crisis easily. Overall, if the pandemic takes a turn for the worse, it is likely to exert temporary pressure on the stock of M&T but the bank is likely to recover even in such a scenario.

Final thoughts

M&T Bank has rallied 22% in the last 12 months and hence it has become less attractive than it was a year ago. However, the stock remains cheaply valued, particularly given its promising growth prospects and the rich valuation of the broad market. Given also the generous dividend of the stock and the ample room for many more dividend hikes, M&T Bank is a great candidate for the portfolios of income-oriented investors.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Ustaad27]

It is surprising that the price to book ratio is not mentioned even once in the article! P/E is the wrong metric to use for valuing banks.

[stackre]

I am a pbct. Stock holder. Is there any advantage of holding on to this ?
I see mtb. Is $165 today. Any comments?
The take over is in May
Thx

[Safer Research and Analysis]

@stackre The merger with MTB calls for PBCT shareholders to receive a fixed exchange ratio of .118 shares of MTB; so PBCT stock price is trading at a slight discount to the value you would get if/when the deal closes based on MTB's current stock price. The deal has still not been approved by the Fed which leaves a little doubt as to if/when it will close. Your shares of PBCT are worth holding onto if you're bullish on the regional bank sector and you believe the deal will get Fed approval.

[stackre]

@Safer Research and Analysis since they announced the take over June 1. How would I know if my shares are preferred?
Would it be advantageous to buy more pbct. Or mtb. Now?
Thx

[rrl1124]

i am also a pbct shareholder who lives near bridgeport and consider this to be a raw deal. the pbct board of directors let its shareholders and employees down.
but best now that the deal goes thru as the staff at pbct is completely demoralized . i sold my preferred , but will do the common stock conversion.
( btw blumenthal mouthed off he would stop the deal, but did nothing.)

[Jus' Thinkin']

@Aristofanis Papadatos Thanks for the article on M & T Bank. I am long both PBCT and the preferred PBCTP. I bought PBCT for its conservative practices and for its increasingly high dividends. I am not thrilled with the upcoming merger. I thought the premium to PBCT common shareholders was too low, and I will miss the substantially higher dividends. But most frustrating has been the utter silence from MTB about the progress towards a final closing date on the deal.

This was announced in Feb 21 with a target of 4Q 21. In that time I have received the grand total of ONE tiny communication from MTB announcing the merger and asking me to stay tuned. I am guessing that was at least 6 months ago. 4Q has come and gone & there is some speculation out there that the closing will happen in 1Q 22, but until the shareholders hear something from the acquiring bank, it remains speculation. It's approaching a year now and still nothing from the bank, nada. I have held tight, collecting the more generous dividends from PBCT than we will get from the new bank, but am increasing frustrated with the lack of visibility here.

At this point, I am willing to remain long and let the merger happen, but MTB needs to show me that they are more shareholder friendly. Long PBCT, JPM, KEY, CMA in the sector.

BTW, can anyone tell me how the transfer of Preferred Shares are handled? It's not like they can just be converted into MTB Preferred because MTB appears not to have issued any. Thanks again.

[Safer Research and Analysis]

@Jus' Thinkin' This deal has been outstanding for 10 months and is at risk of not getting Fed approval given the enhanced scrutiny on bank mergers involving banks w/ assets >$100B.
As for the preferred, PBCT Pfd holders will receive shares of the new M&T Pfd stock (see p157 of S-4/A). M&T did a large Preferred offering that closed on August 17, 2021.

[ejmanuel]

@Jus' Thinkin' you’re putting the blame in the wrong place. Bureaucrats in DC are putting large bank mergers on hold until there is additional public comment. Like there hasn’t been enough time already…

[Jus' Thinkin']

@Safer Research and Analysis Thanks for the heads up on the Preferred. I guess that one got by me.
Still not happy about lack of communication about the delay. Obviously the author is not aware of it; no mention here or by another SA author yesterday, Sheen Bay Research. 2 articles in 2 days and neither author mentions "enhanced scrutiny" ?? I guess I'm not alone.