Research Brief
Today we are back in regional bank land and covering M&T Bank (NYSE:MTB), which just had its Q2 earnings release on July 19th, which we will go over in this research analysis.
Some notable items about this bank, from its company website: traces its roots to Buffalo NY as the Manufacturers & Traders Bank, trades on the NYSE, over 1,000 branches spanning 12 states in the northeast & mid-Atlantic region.
Ratings Methodology
Our goal is to find undervalued stocks of companies with solid financial fundamentals, that pay competitive dividend yields. Our key industry focus is tech, financials, insurance, innovation.
To simplify my rating of an equity, I have broken it down into whether I would recommend or not recommend based on these individual factors:
- Valuation vs Sector Average.
- Dividend Yield vs Sector Average.
- Positive YoY Net Income Growth.
- Capital & Liquidity Strength
- Stock Price vs 200 Day SMA.
If I recommend on all 5 categories, it is a "strong buy", 4 categories is a "buy", 3 is a hold, and less than that is a sell rating. Then I compare my rating to the consensus ratings from Seeking Alpha & Wall Street.
Valuation vs Sector Average: Recommend
A good place to start this analysis is the valuation. We will use GAAP-based forward P/E and forward P/B ratios, taken from Seeking Alpha data, and compare it to the industry average.
We like its forward P/E of 8.45, which earned a "B" grade from Seeking Alpha and is around 14% lower than its sector average.
Also, its forward P/B ratio of 0.90 earned a "B" grade and is close to 13% lower than the sector median for this stock.
We are looking for stocks that have valuations at least 10% below their sector average, so in this category we recommend this stock.
Dividend Yield vs Sector Average: Recommend
Next, we will look at the dividend yield, as our analysis is oriented towards dividend-income investors, with the goal of investing into an existing "income stream."
As of July 19th, this stock offers a yield of 3.86%, with a quarterly dividend of $1.30 per share:
Further, we are impressed by this stock's 5 year positive dividend growth, as it went from an annual dividend of $3.55 in 2018 to $4.80 in 2022, a 35% increase over 5 years, a sign this bank is committed to returning capital back to shareholders steadily:
Also notable is that the dividend yield for M&T is currently over 4% above the sector average. Our benchmark is to look for a yield at least 3% above the sector average, so it beats in this case:
Based on the above data, we recommend this stock in the category of dividend yield vs its sector average, and later in the article we will show you how this dividend income is used in our portfolio simulator to maximize return on capital.
Positive YoY Net Income Growth: Recommend
It's that time of season.. bank quarterly earnings results! M&T will be our first Q2 earnings review, so let's do a quick dive into one thing we care about as analysts, and that is positive net income growth. We like to say that we are not just buying shares, but investing into an existing "income stream."
The good news is, YoY net income growth was significantly positive, achieving an impressive 299% increase as the table below shows from their Q2 earnings presentation which we will use as a reference:
Also worth to mention, as net interest income is a major driver of how a bank makes money, though the only driver, M&T saw a 27% increase YoY in its net interest income, as shown in its Q2 earnings release:
I think this correlates well with the year of interest rate hikes by central banks, but also in my opinion looking forward to Q3 I think this bank will continue to benefit from the rate environment especially since the CME Fedwatch survey of rate traders now shows a 99% probability of another Fed rate hike at its upcoming July 26th meeting.
However, the bank also benefitted from selling its CIT business, which closed in Q2. From its earnings release:
In April 2023 M&T completed the divestiture of its Collective Investment Trust ("CIT") business to a private equity firm. The sale of this business resulted in a pre-tax gain of $225MM in the second quarter of 2023 results of operations.
Another factor to look at is income diversification, and this bank has shown it so far. For Q2, it saw 41% YoY non-interest income growth, and if we exclude "other revenue" that was impacted by the CIT sale, we see that there was YoY growth of 29% in their mortgage business, along with 4% YoY growth in the brokerage:
Based on the evidence above, I would recommend this stock in the category of positive net income growth.
Capital & Liquidity Strength of Company: Recommend
In this category, we are considering the capital & liquidity situation of this bank.
The first thing to consider of importance to a bank is CET1 ratio, and although M&T saw a YoY decrease, it remains above the regulatory standards:
According to Statista, based on Basel III standards the CET1 should be at least 4.5%, so M&T far exceeds that. In fact, its current CET1 of 10.58% is in line with 2022Q2 ratios for top banks like Wells Fargo (WFC). & Bank of America (BAC):
To drill down into some of this bank's assets on its books, it has $59.B in securities and cash at the end of Q2, allocated along a mix of deposits at other banks, cash, available-for-sale and held-to-maturity securities:
Looking at its balance sheet over the last several years, the bank has positive equity every year with assets far exceeding liabilities, and has consistently had positive free cashflow per share.
We therefore recommend this company on the basis of capital & liquidity strength for a bank its size & scope.
Stock Price vs 200 Day SMA: Recommend
I have reduced our charts analysis to the following simplified approach: tracking the 200 day simple moving average over a 1 year timeframe and looking for a buy price that is within 5% of the SMA, above or below. Consider the following chart:
As of midday trading on Wednesday July 19th, this stock was trading around $137.95. Since the 200 day SMA is $143.20, buying within 5% of this average puts my buying price range at $136.04 - $150.36.
Since it is currently trading within 5% of the 200 day average, I would recommend it in this category. Staying within a specific price range of the moving average and tracking it can present a buying opportunity and avoid overly bullish or overly bearish trends, but rather follows the long-term moving average more closely, so we can buy into slightly bearish or slightly bullish trends in relation to the long-term average, not trying to "time" the short term market movements.
Below is a hypothetical example from my portfolio simulator, where we buy 100 shares of this stock at $136 (5% below the current SMA), holding for a period of 1 year so we can earn the full dividend yield, and selling at $150 (5% above the current SMA):
This simulation locks in the 1 year dividend income, plus assumes an exit from the stock at a capital gain, generating a total return on capital of over 14%.
*Note: This is just an example and may or may fit your own portfolio strategy, in addition to the risk of unrealized losses (paper losses) that may occur during holding periods of 1 year, as moving averages can create both favorable and unfavorable scenarios.
Ratings Score: Strong Buy
Today this stock won all 5 of my rating categories and is getting a strong buy rating. My rating is in line with the consensus by SA analysis, but more bullish than the Wall Street consensus and the SA quant system, as shown below:
Risks to my Outlook: Credit Risk Exposure
A risk we identified is that the nature of this firm's business is that it is exposed to credit risk, and we expect investors to have the same concern, thereby impacting our bullish outlook for this stock.
In its Q2 presentation just released, what gets our attention is that although non-accrual loans have decreased YoY, what has increased YoY has been net charge-offs, provision for credit losses, and allowance for credit losses:
Company management in its earnings commentary attempted to explain some of the figures:
The increase in net charge-offs was driven by four large credits, three office buildings in New York City and Washington, D.C., and one large health care company operating in New York State.
Annualized net charge-offs as a percentage of total loans were 38 bps for the second quarter, compared to 22 bps in the first quarter. This brings our year-to-date net charge-offs to 30 bps, which is below our long-term average of 33 bps.
As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis. This is the result of the unique nature of each property and borrower.
This at least can calm some investors, considering that the net charge-offs remain below the long-term average, and it appears driven by individual properties.
I think it's best to evaluate this credit risk over several quarters, rather than just Q2, so I am hopeful that by Q3 we see some improvement in the above numbers.
Analysis Wrap Up
To wrap up this analysis today, here are key points we went over:
As my first time rating this stock, today I am giving it a strong buy rating, which is in line with the recent consensus from SA analysts.
Positive points on this company: valuations lower than sector average, dividend yield higher than sector average, positive net income growth, capital & liquidity strength for a bank its size, and the stock price vs its 200 day SMA is within a favorable buying range based on our simulation.
Now that this bank's Q2 earnings call is over and done with, we look forward to seeing results from some of its peers soon as well. We still think the regional banks have lots of potential, if one can find an undervalued bank with good fundamentals.
This article was written by
Albert Anthony
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Albert Anthony & Company is an equities research firm founded in Austin Texas as a sole proprietorship in 2021 and managed 100% remotely from remote offices in the US and Europe. We focus solely on research & analysis of dividend-income stocks and foreign ADRs that trade on US exchanges (NYSE, Nasdaq). Our founder and President is the Croatian American business author and markets columnist who writes under pen name Albert Anthony. He is a native of the New York City area and has also called home Austin Texas, the Pacific Northwest, as well as Croatia in southern Europe. His background includes a B.A. from Drew University, as well as training in IT & management concepts from Microsoft, Corporate Finance Institute, CompTIA, Coursera, and UVA Darden School of Business. He has worked as a technical analyst in the IT department of major US financial firm Charles Schwab, as well as IT roles in several other large companies. Albert Anthony has written a 5-star book on Amazon called Leadership & Management. Albert Anthony & Co is a registered trade name in Travis County, State of Texas (US) and also a PayPal Verified company. *Author Disclosure | The contributor discloses that they are not a registered financial advisor, broker-dealer, tax advisor or retirement advisor. All articles are to be considered general market commentary and personal opinion on a stock rather than a personalized recommendation to invest in a particular equity. The contributor does not receive any compensation from the companies being rated, and does not own a material holding of stock in any of the companies rated at the time of article publication. Any supporting data provided in articles is publicly-available and does not contain any confidential or proprietary information. Articles are the author's own opinion and not that of any past or current employer. The contributor/author does not guarantee a specific level of performance of any company being rated and encourages readers to consult multiple resources before making investment decisions. We do not cover OTC/pink sheet, stocks trading on non-US exchanges, mutual funds, bonds, or any topics related to crypto currency and bitcoin.
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.
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