DBRS Morningstar Confirms M&T at A (high) on PBCT Acquisition Announcement; Trend Remains Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of M&T Bank Corporation (M&T or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Manufacturers & Traders Trust Company (the Bank). The trend for all long-term ratings at the Company and all long-term ratings at the Bank remains Negative. The ratings action follows the announcement by M&T that it is acquiring Peoples United Financial, Inc. (PBCT) for approximately $7.6 billion in stock. The deal is expected to close in 4Q21, subject to customary closing conditions, including regulatory approvals, as well as shareholder approval from both companies.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects DBRS Morningstar’s view that the acquisition is a sound strategic fit that should enhance M&T’s already solid regional banking franchise, while strengthening the Company’s profitability metrics. The acquisition offers scale entry into attractive New England markets, meaningful identified cost savings and potential revenue synergies across multiple business lines. Moreover, M&T’s strong liquidity position, core deposit funding and sound capital position should remain intact upon closing of the acquisition. While DBRS Morningstar is wary of the substantial integration risk associated with large transactions, these concerns are mitigated when considering M&T’s proven track record of strengthening its franchise through selective acquisitions and successfully integrating them.

The Negative trend reflects the adverse impact resulting from the Coronavirus Disease (COVID-19) pandemic and low rate environment, which has weakened earnings and asset quality. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which in our view, has mitigated some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

RATING DRIVERS
Given the Negative trend and current economic environment, an upgrade of the ratings is unlikely. However, DBRS Morningstar would revise the trend to Stable if the fallout from the coronavirus pandemic does not result in outsized credit losses or a sustained weakening of profitability metrics. Conversely, a downgrade of ratings would arise from a sustained deterioration in asset quality, or prolonged negative operating leverage, or if the merger integration is poorly executed.

RATING RATIONALE
DBRS Morningstar sees the transaction as a long-term positive for M&T’s franchise. On a pro-forma basis, the combined company will become the 11th largest U.S. commercial bank, with $200 billion in total assets and leading market share positions across an attractive footprint. DBRS Morningstar expects the combination to provide significant revenue growth and cost savings opportunities, while also allowing the combined entity to leverage its considerable scale to increase investments in technology. Additionally, PBCT’s equipment finance business will be additive to M&T’s national businesses. Importantly, credit fundamentals are expected to remain sound, providing key support to the ratings confirmation. The combined company is expected to have a pro-forma CET1 ratio of more than 10% at closing, modestly above M&T’s current capital levels.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for M&T are as follows: Franchise Strength – Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong/Strong; Capitalization – Strong.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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