Q3 2023 Earnings Summary
- M&T Bank's net charge-offs decreased to 29 basis points in the third quarter of 2023, below the long-term average of 33 basis points, indicating strong credit quality and effective risk management. Management highlighted that they are "on top of the portfolios" and are proactively managing potential risks.
- The bank has a strong capital and liquidity position, with period-end cash balances rising to $30 billion, providing flexibility ("dry powder") to support customers and pursue growth opportunities. Management stated that they are well-prepared to deploy capital in a shareholder-friendly manner when appropriate.
- Opportunities for loan growth identified in areas like auto dealerships, large corporate banking, and fund banking, suggesting potential for revenue growth. The bank is focusing on growing relationships and balances in loan categories without widening their credit criteria.
- Increasing credit risk in Commercial Real Estate (CRE), especially office properties, is evident with a mid- to high single-digit percentage increase in criticized loans, primarily in the Investor Real Estate (IRE) portfolio on the office side. The bank is also increasing allowances for credit losses, including a $50 million increase this quarter, with about half allocated to the CRE portfolio, indicating concerns about potential future losses in that sector.
- Ongoing declines in non-interest-bearing deposits are putting pressure on net interest margin (NIM), and there's uncertainty about when net interest income (NII) will stabilize. The bank experienced a $2.3 billion decline in non-interest-bearing deposits, which is a significant driver for NIM compression. Management acknowledges that they need a couple more quarters before they can say that NIM will stabilize, indicating potential continued declines in NII.
- Regulatory changes requiring higher capital buffers, including the inclusion of Accumulated Other Comprehensive Income (AOCI) volatility in regulatory capital, may force the bank to maintain higher capital levels. Management anticipates starting with a higher capital cushion due to these new rules, which could potentially limit returns on equity and shareholder returns. Additionally, the bank is currently not repurchasing shares despite having excess capital, due to a cautious stance on economic conditions, which may signal concerns about future profitability and growth.
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Net Interest Income Outlook
Q: When will NII and margins stabilize?
A: Margins will stabilize when deposit disintermediation, especially in noninterest-bearing deposits, slows down. These deposits were down $2.3 billion, better than expected, and signs indicate slowing. Asset repricing is strong, with the consumer loan portfolio up 22 basis points, auto loans up 300 basis points, and RV loans up 250 basis points on what's rolling off versus on. While it's hard to predict, margins may stabilize in the next couple of quarters, but we need more data to confirm this trend. -
CRE Exposure and Loan Loss Reserves
Q: How is CRE, especially office and multifamily, affecting your reserves?
A: We're actively managing our CRE portfolio, particularly office loans, and added over $50 million to allowances this quarter, with about half allocated to CRE. Valuations are challenging due to limited market activity, but we feel adequately reserved despite some softness in asset values. We're also monitoring multifamily closely but haven't seen significant issues yet. -
Capital Return and Buybacks
Q: When will you resume share buybacks?
A: Despite having excess capital, we're cautious due to economic unpredictability and higher rates potentially stressing clients in the coming quarters. We'll consider repurchases when the economy stabilizes; our capital distribution strategy remains, but we're focused on staying strong to support our customers now. -
Capital Position and Regulatory Impact
Q: How are you managing your CET1 target amid new regulations?
A: With new rules, we'll initially maintain a higher capital buffer but will tighten it over time as we adjust. We'll modify our investment portfolio to reduce volatility, possibly running shorter durations or hedging longer investments, due to AFS securities impacting regulatory capital ratios. -
M&A Strategy
Q: What's your view on M&A in the next 12-24 months?
A: M&A is still part of our strategy to build market density. High rates make it more challenging due to capital impacts, but we're looking for opportunities that align with our focus on long-term customer relationships. -
Credit Impact of Higher Rates
Q: Are higher rates affecting your customers as swaps roll off?
A: Yes, as swaps mature, clients face higher interest payments, impacting sectors beyond CRE. We're proactively monitoring portfolios to address potential issues and support our customers. -
Loan Growth Opportunities
Q: Which lending areas are you focusing on?
A: We're seeing growth in our dealer business, large corporate banking, and fund banking, particularly in the C&I space. While we're cautious, we're open to supporting customers without widening our credit criteria. -
Reserve Build Drivers
Q: What drove additional reserve builds this quarter?
A: Softness in asset values within the CRE portfolio prompted us to add reserves, despite stable macroeconomic factors. We're committed to maintaining robust allowances to meet borrower needs and regulatory requirements. -
Charge-Off Guidance and 2024 Outlook
Q: How might charge-offs trend into 2024?
A: Charge-offs may be higher in Q4 than the 29 basis points in Q3, but it's uncertain. While we're not providing 2024 guidance yet, we'll build allowances as economic conditions and customer behaviors dictate.