2 Problems That Could Derail M&T Bank Corporation (MTB)’s Growth

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Just like the team they represent, M&T Bank Corporation (NYSE:MTB) is off to a great start in 2013. As the official bank of the Baltimore Ravens, both the team and the bank have a lot to squawk about. The Ravens of course won the Super Bowl, and M&T should win some sort of trophy for their recent results. However, even though the bank’s earnings were generally impressive, there are two issues that investors need to keep an eye on.

M&T Bank Corporation (NYSE:MTB)This Is A Tough Place To Play
To find M&T’s competition, you only have to look in local neighborhoods around Maryland. As the bank of the Ravens, this helps potential customers identify M&T among their competitors, but in this area competition is tough. Super-regional banks like BB&T Corporation (NYSE:BBT)PNC Financial Services (NYSE:PNC), and SunTrust Banks, Inc. (NYSE:STI) all have locations in M&T’s backyard. Aside from SunTrust, which has been going through some troubles, BB&T and PNC have both been strong banks looking to take deposit and loan market share.

Investors looking for strength in the banking system should look to the Eastern U.S. as proof that multiple banks can show good growth at the same time. While their larger rivals fight to take business from each other, and make complicated deals underwriting debt, making derivative trades, and generally confusing investors, these super-regional banks stick to what they do best, they gather deposits and make loans.

In the current quarter, M&T grew deposits by 10%. While these results compare favorably to SunTrust’s growth of 2%, or BB&T’s growth of 8.1%, they fell just short of PNC’s growth of 11%. When it comes to lending, M&T increased their loan portfolio by 11% year-over-year. By comparison, BB&T saw growth of 9.3%, SunTrust reported average loans up 3%, and PNC grew loans by an impressive 17%. That being said, I should point out that PNC continues to mention their RBC Bank acquisition as a key driver of their results. Without the RBC acquisition, it’s possible M&T would have lead this group.

The Good And The Bad
While it looks like M&T did a good job of growing deposits and loans, their credit quality wasn’t quite as good as some of their competition. M&T reported non-performing loans at 1.52% of total loans. While this was better than PNC at 1.75%, it trailed results from SunTrust at 1.27% and BB&T at 1.2%. Unfortunately for investors, this leads me to my first big concern. M&T has the second highest non-performing loan ratio of the four banks we’ve looked at, yet they have the lowest provision for loan losses.

When a bank realizes it may have a problem loan, it sets aside money to cover this debt. Banks usually set aside more than $1 for each potential $1 of loan loss, because of the costs involved to settle these accounts. For instance, BB&T’s coverage ratio is 146%, PNC’s coverage ratio is 124%, and SunTrust’s ratio is 180%. This means each bank has at least $1.24 for every $1 of problem loans. M&T’s current ratio is 91.68%. This less than 100% coverage ratio means, if the bank doesn’t see an improvement in their non-performing assets, they may have to take a charge in future quarters to deal with these potential losses.

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