DBRS Morningstar Revises M&T Bank Corporation’s Trend to Negative; Confirms Long-Term Issuer Rating at A (high)

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 has been revised to Negative from Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The revision of the trend to Negative reflects M&T’s commercial real estate concentration, including an outsized exposure to more problematic sectors including office, which has led to a current above-trend level of nonperforming loans (NPLs) and criticized loans. While the CRE concentration has historically been very well managed, the slow return to office, combined with higher interest rates and lower valuations will likely result in greater than previously anticipated asset quality pressure. The Negative trend also considers that M&T’s capital cushions relative to requirements are thin relative to peers.

The ratings confirmation recognizes M&T’s strong banking franchise and solid performance in recent periods with the Company’s net interest income and net interest margin (NIM) getting a boost from higher interest rates. Additionally, the ratings consider the Company’s consistent and disciplined loan underwriting, which has underpinned its long history of low earnings volatility and financial outperformance, particularly during times of stress.

RATING DRIVERS
A sustained deterioration in asset quality, evidenced by a continued build in NPLs and criticized loans would result in a ratings downgrade. Prolonged negative operating leverage, or a reduction in the regulatory capital buffer would also result in a downgrade. Given the Negative trend, we do not expect a ratings upgrade near term. If M&T maintains sufficient profitability while restoring asset quality metrics and attaining higher capital levels, the trend would return to Stable.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong / Good
Led by a long-tenured management team, M&T maintains a deeply entrenched commercial banking franchise throughout the Northeast and Mid-Atlantic regions, underpinned by a large, relatively stable and low-cost deposit funding base which is diversified across consumer and commercial categories. M&T also garners significant levels of non-interest income through a variety of business lines, including trust. The Company is, as of March 31, 2023, the 18th largest U.S. commercial bank (excluding First Republic Bank), with $203 billion in total assets and leading market shares across an attractive footprint.

Earnings Combined Building Block (BB) Assessment: Strong
M&T’s earnings power remains strong, supported by a diverse set of businesses, which generate a solid level of fee income (currently around 25-30% of total revenue). The Company’s earnings power is supported by its higher NIM, consistently strong efficiency levels, and credit policy which stresses recoveries on problem loans. M&T’s NIM is higher than peers due to its history of loan portfolio weighting towards C&I and CRE loans and higher than peers levels of non-interest bearing deposits. The Company’s People’s United Financial acquisition, as well as its decision to retain residential mortgage loans on balance sheet, has rebalanced the loan portfolio to be approximately equally weighted between C&I, CRE, and Consumer.

Risk Combined Building Block (BB) Assessment: Good
M&T has a track record of low net charge offs as it combines conservative underwriting with a focus on recoveries on loans through various cycles. While NCO levels continue to be benign, we note the build-up in non-performing and criticized loans, and remain concerned about M&T’s commercial real estate exposure, which represents about 34% of total loans. Moreover a meaningful portion of this CRE exposure is concentrated in New York City (about 13% as of 2022) in some vulnerable sectors, including office, hospitality, retail, and healthcare which were harder-hit by the pandemic. M&T’s loan loss coverage increased through 1Q23, as the bank built reserves to reflect deterioration in the economic outlook, increased loans, and specific deterioration in the commercial portfolios.

M&T’s high quality, UST, agency RMBS weighted securities portfolio was about $28 billion as of 1Q23, with plans to move to about $30 billion this year. The Company’s important decision to defer reinvesting in securities through much of 2021 and their decision to maintain a relatively short duration portfolio has meant, and likely will continue, the track record of low AOCI related mark to market impacts with increased financial flexibility.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
M&T’s funding and liquidity remain strong, underpinned by a sizable deposit base and high quality investment securities portfolio. The 1Q23 market volatility and the migration of deposits to higher yielding products changed the composition of the deposit base, while there was some expected run-off. Deposit account sizes are relatively small and granular, with about 43% uninsured deposits as of 1Q23. MTB issued $3.5 billion in long term senior debt in 1Q23 to fund loan growth and bolster liquidity, anticipating that competition for deposits and continued migration to money market funds and sweep accounts would pressure deposits somewhat in 2023.

Capitalization Combined Building Block (BB) Assessment: Good
We view the Company’s capitalization as good, especially considering its track record of maintaining low credit losses. M&T had a CET1 ratio of 10.15% as of 1Q23, with a 95 basis point cushion above their required CET1 level of 9.2%. Management intends to increase CET1 levels to remain conservative on capital levels given uncertainty in the market and economic outlook. Currently with a stress capital buffer (SCB) of 4.7%., the highest among regional banks, M&T anticipates some relief due to lower CRE and Construction exposures, and increased loan portfolio diversification. M&T plans to continue targeting $600 million in share buybacks, some capital retention, and some room to fund loan growth in coming quarters due to their expectation of solid earnings generation. In late February, M&T’s board of directors reauthorized a stock repurchase program of up to $8 billion.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415696

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/ dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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