M&T Bank (MTB, Financial) is a regional powerhouse that has been on an interesting ride for the last few years. The bank has managed to survive the financial crisis without a single year of negative EPS and has grown its earnings substantially since the financial crisis ended. However, in the last few years M&T earnings have declined to below 2012 EPS. M&T also sees its revenues consistently remaining flat.
Like the rest of the banking sector, M&T has been struggling with the zero-interest rate environment. On top of a lack of revenue growth, M&T entered into an agreement to merge with Hudson City Bancorp (HCBK, Financial) three years ago. Recently the merger was approved by the Federal Reserve and slated to close within a few weeks.
Hudson City merger
It's great news to see the bank merger with Hudson City finally go through, but the merge with Hudson City does not seem likely to lead to substantial revenue growth for the company. Over the next few quarters M&T will see its efficiency ratio rise substantially due to the expensive cost of a merger. Going forward, M&T will see its earnings take a hit due to higher operating expenses. The bank is clearly chasing growth with its acquisition of Hudson City, but it comes with a great cost. M&T paid a premium for Hudson, and the cost of integrating with Hudson City will lay heavy on M&T.
M&T third quarter results
In the third quarter M&T saw revenues increase by 90bps; however, the company did miss analysts' estimates on EPS. Clearly the lack of revenue growth is taking its toll on M&T’s earnings. It is nearly impossible for M&T and other banks to see revenues in a zero-interest rate environment, but M&T Bank did post an impressive $5.7 billion increase in average earnings asset, offset by lower NIM losses during the third quarter. During the third quarter M&T saw NIM fall 9bps to 3.12%, compared to the third quarter last year. On the upside M&T's NIM is still above an average level. The bank’s NIM is now falling at more of a moderate pace.
Valuation
| Banks | Current P/E | Price To Operating Earnings | P/B | Return On Equity | Return on Assets | Return On Invested Capital |
| M&T Bank | 16x | 10.3x | 1.9x | 9.2% | 1.1% | 7.2% |
| Wells Fargo | 13x | 8.3x | 1.6x | 12% | 1.2% | 6.7% |
| JP Morgan | 12x | 8.6x | 1.2x | 9% | 0.99% | 17% |
M&T Bank has a very rich valuation compared to some of its larger competitors. This is in addition to the bank already trading for 1.9x tangible book value and 14x its projected next year EPS. M&T is selling for 10.3x its operating earnings and 16x its current earnings. These valuations are highly expensive for a bank that isn’t growing. M&T is selling for a higher price to book value than some of their larger competitors like Wells Fargo (WFC, Financial) and JPMorgan (JPM, Financial). Both Wells Fargo and JPMorgan are selling for 1.2x and 1.6x book value and growing revenues unlike M&T. When comparing the value offered by M&T with both Wells Fargo and JPMorgan, you come to the conclusion that M&T isn’t the best investment to make.
Risk
Investors who invest in M&T at its current market price are paying a massive premium for little to no growth. The bank is overvalued, and investors are at risk of losing their capital by investing in the bank. On top of being overvalued, the bank's recent acquisition will increase operating expenses, which will hurt earnings going forward. Investors should beware when investing in M&T, especially when there are far better places to place capital.
