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M&T Bank’s commercial loan portfolio, which includes exposure to urban hotels and construction projects, continues to weigh on the company’s earnings.
The Buffalo, New York, bank has moved some commercial clients to a “watch list” after those businesses have struggled to pass inflationary costs along to their customers, Chief Financial Officer Darren King said Wednesday.
“Input costs have risen faster than pricing,” King said during a call with analysts after M&T reported its second-quarter results. “That’s led to some decreases in debt service coverage.”
M&T is doing “a bit of remixing” in its commercial lending business, according to King, who said that he isn’t ready to give “the all-clear signal.”
“We’re seeing more people in the office, but it’s not back to pre-pandemic levels,” he said. “So, we’re seeing no improved performance in retail and hotel within the real estate space, and still some challenges in the healthcare and office space.”
At the same time, King assured investors that the $204 billion-asset bank is not seeing indications of stress from consumer accounts.
“We’re always worried and looking for where the next issue could be,” he said. “But there’s nothing that’s flashing red right now that says there’s a big crisis coming.”
Gerard Cassidy, an analyst for RBC Capital Markets, said in an interview that M&T has a “culture of conservative underwriting.”
He cautioned, however, that the bank’s second-quarter results were affected by its $7.6 billion acquisition of People’s United Financial, a deal that closed in April, making it “hard to see some of the underlying trends.”
Hotel loans have been a particular source of concern for M&T since the earlier stages of the pandemic. During the fourth quarter of 2020, the bank recorded a large jump in nonaccrual loans, and about 80% of the increase was tied to hotel loans. Many urban hotels have been hurt by the pandemic-era decline in business travel.
The bank “got caught in the pandemic” holding urban hotel exposure that “alarmed a number of investors,” Cassidy said. “But through cycles for 30 years, this company has outperformed all its peers in credit losses, and we expect that to be the case again.”
M&T reported $50 million in net charge-offs during the second-quarter, an 8.7% increase from the same period last year, though the results were skewed by the People’s United merger. Nonaccrual loans as a percentage of total loans declined from 2.31% a year earlier to 2.05%.
The bank’s allowance for credit losses as a percentage of loans outstanding fell from 1.62% a year earlier to 1.42%.
Net income during the quarter was $218 million, down about 52% from the same period last year, reflecting lower mortgage banking revenues. Earnings per share of $1.08 were well below the $2.39 estimate by analysts surveyed by FactSet Research Systems.
Noninterest expenses rose 62% from the second quarter of last year to $1.4 billion, largely reflecting the impact of the People’s United acquisition.
M&T’s net interest margin climbed 24 basis points from the year-ago period to 3.01%.
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