Q3 2024 Earnings Summary
- Strong Capital Position Enabling Increased Shareholder Returns: M&T Bank's CET1 ratio is a robust 11.5%, providing significant flexibility to increase share repurchases in 2025 and return more capital to shareholders.
- Improving Asset Quality with Declining Criticized Loans: The bank is experiencing significant improvements in asset quality, with criticized loans decreasing by over $1 billion and 91% of criticized loans paying current, indicating strong credit performance and client commitment.
- Diversified Growth in Loan Portfolio and Fee Businesses: M&T Bank is diversifying its loan portfolio, expanding in consumer and C&I loans, and expects to resume growth in CRE, enhancing revenue prospects. The bank also has strong fee businesses like wealth management and Institutional Client Services (ICS).
- Increase in consumer lending may lead to higher net charge-offs and higher allowance balances due to the higher risk associated with consumer loans . The shift in loan mix could impact future earnings as consumer loans typically have higher charge-off rates.
- Uncertainty over future capital returns, such as share repurchases, due to potential economic slowdown . MTB's plans to return more capital to shareholders in 2025 depend on economic conditions, and a slowdown could impact these plans.
- High level of criticized loans with potential risk if interest rates do not decline further . While criticized loans have decreased, 91% of them are still paying current, and further improvements may require interest rates to go lower.
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Capital Return Plans
Q: Will you increase share repurchases in 2025, and what is your optimal CET1 ratio?
A: We have flexibility with a CET1 ratio of 11.5%. As we enter 2025, we expect to return more capital to shareholders, potentially increasing share repurchases while targeting a CET1 ratio above 11%. This depends on economic conditions and loan growth, but we believe we're well-positioned to enhance shareholder returns. -
Net Interest Income and Margin Outlook
Q: Can NII and NIM continue to improve if rates decrease as projected?
A: We believe net interest income and margin will continue to improve into 2025, driven by positive repricing in our fixed asset portfolios and strong core deposits. Even if rates remain flat or change, structural factors in our balance sheet support an upward trajectory in NII and NIM. We have locked-in hedges that will enhance yields, and a positively sloping curve would further benefit us. -
Criticized Loans and CRE Exposure
Q: Are criticized loans expected to decline further, and do lower rates impact this?
A: Our criticized loans have declined for two consecutive quarters, and we expect a strong decrease in the fourth quarter. Lower rates facilitate takeouts and paydowns, improving our criticized loan levels. While we anticipate continued downward trajectory in 2025, we don't expect to eliminate criticized loans entirely, as supporting our clients is part of our long-term strategy. -
Loan Growth Outlook
Q: Will loan growth accelerate in 2025, particularly in CRE?
A: We see pipelines building in CRE, but it may take a couple of quarters before balances grow. We expect to stop shrinking CRE and begin growing it in 2025, supporting revenue growth. Overall loan growth may average around 1% per quarter, but this depends on market conditions and prudent lending practices. -
Deposit Beta Trends
Q: How do you see deposit betas evolving with rate cuts?
A: Our deposit betas peaked at about 55% on the way up; we expect them to end up around the same level on the way down. We anticipate an initial 40% beta repricing down in the fourth quarter , and planning and execution should allow us to continue this trend into 2025. -
Funding and Deposit Growth
Q: Can deposit growth fund loan growth, or will cash balances be utilized?
A: We aim to grow deposits faster than loans, maintaining an "always on" approach to deposit gathering. We prefer to reduce noncore funding while focusing on customer deposits. We may invest more in securities, with plans to add $3 billion in the fourth quarter , and manage cash at the Fed to maintain flexibility. -
Expense Outlook and Operating Leverage
Q: What operating leverage do you expect in 2025?
A: We anticipate positive operating leverage in 2025, potentially in the range of 150 to 200 basis points. While expenses may rise due to projects and incentive payouts, we believe 2025 will be a better year, supported by momentum in revenue growth and efficiency improvements. -
Asset Mix and Charge-Off Expectations
Q: How will changes in loan mix affect charge-offs and reserves?
A: As we grow our lending categories, particularly in consumer loans, we expect higher net charge-offs due to the mix change. While our historical through-the-cycle charge-off rate is 34 basis points , the shift towards consumer lending may lead to a slightly higher charge-off rate. We're ensuring good returns on these assets and believe diversification benefits outweigh the impact. -
Loan Repricing Benefits
Q: What uplift are you seeing from loan repricing?
A: Fixed-rate loans rolling on and off are yielding a net benefit of about 150 basis points. Specifically, C&I fixed-rate loans are up 1%, CRE up 1.3%, mortgages over 2%, and consumer loans up 1.4% , positively impacting net interest income and margin. -
Noninterest-Bearing Deposits
Q: What is the outlook for noninterest-bearing deposits?
A: We expect noninterest-bearing deposits to remain stable, averaging around 30% excluding brokered deposits. While there may be some volatility, particularly from our ICS business balances, we feel good about our position. As rates come down, the value of these deposits decreases, so we must work harder to maintain spreads and margins.