M&T Bank’s commercial loan portfolio, which includes exposure to city hotels and construction projects, continues to weigh on the company’s earnings.
The bank in Buffalo, New York, has placed some business customers on a “watch list” after those businesses struggled to pass inflationary costs onto their customers, chief financial officer Darren King said Wednesday.
“Input costs have risen faster than prices,” King said on a call with analysts after M&T reported second-quarter results. “This has led to a decrease in debt service coverage.”
M&T is doing “a bit of remixing” in its commercial lending business, according to King, who said he was not ready to give “the clear signal”.
“We’re seeing more people in the office, but it’s not back to pre-pandemic levels,” he said. “So we’re not seeing any improvement in performance in retail and hospitality in the real estate space, and there’s still healthcare and office.
At the same time, King assured investors that the $204 billion asset bank saw no indications of stress coming from consumer accounts.
“We’re still worried and looking at where the next problem might be,” he said. “But there’s nothing flashing red right now that indicates there’s a big crisis coming.”
Gerard Cassidy, analyst for RBC Capital Markets, said in an interview that M&T has a “cautious underwriting culture”.
He warned, however, that the bank’s second-quarter results were hit by its Acquisition of $7.6 billion from People’s United Financial, a deal that was reached in April, making it “hard to see some of the underlying trends.”
Hotel loans have been a particular concern for M&T since the early stages of the pandemic. During the fourth quarter of 2020, the bank recorded a strong increase in outstanding loans, and about 80% of the increase was related to hotel loans. Many city hotels have been affected by the decline in business travel in the pandemic era.
The bank “got caught up in the pandemic” holding exposure to city hotels that “has alarmed a number of investors,” Cassidy said. “But through cycles for 30 years, this company has outperformed all of its peers in terms of credit losses, and we expect it to do so again.”
M&T recorded $50 million in net charges in the second quarter, an 8.7% increase over the same period last year, although the results were skewed by the People’s United merger. Unexpired loans as a percentage of total loans decreased to 2.05% from 2.31% a year earlier.
The bank’s provision for credit losses as a percentage of outstanding loans fell to 1.42% from 1.62% a year earlier.
Net income in the quarter was $218 million, down about 52% from the same period last year, reflecting lower mortgage banking revenue. Earnings per share of $1.08 were well below analysts’ estimate of $2.39 polled by FactSet Research Systems.
Non-interest expense rose 62% from the second quarter 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 period a year ago to 3.01%.