M&T Bank is trying to clear up what it sees as a misunderstanding about its plans in commercial real estate lending.
The $151.9 billion-asset company will keep making CRE loans, but it will also begin to “think more broadly and include other sources of capital and act as an intermediary” on behalf of borrowers seeking such loans, Chief Financial Officer Darren King told analysts this week during the bank’s quarterly earnings call. Those other sources of capital include mortgage finance subsidiary M&T Realty Capital as well as insurance companies, he said.
“We don’t necessarily have a hard target of what we’re trying to get to, but we’re just trying … to be a little better balanced,” King said Wednesday.
Some analysts who listened to the call concluded that M&T, whose CRE portfolio is about twice the size of peer banks, is thinking about how to reduce the size of its book, in part to ease some capital requirements imposed by Federal Reserve-run stress tests.
In a research note published after the call, analyst Brian Foran of Autonomous Research said “it sounded like” M&T might “look to shrink” some of its multifamily loan book.
Piper Sandler analyst Frank Schiraldi wrote in a note that “management was more direct than in the past that over time it will look to reduce its outsize CRE portfolio … given more onerous treatment in Fed stress testing.” In a post-call interview, Schiraldi said the company appears to want to reduce CRE loans as a percentage of its total loan portfolio.
The discussion of CRE loans came in response to an analyst’s question about M&T’s long-term intentions for the portfolio, which includes hotel loans that have been
Currently, commercial real estate loans make up about 30% of M&T’s entire loan portfolio. That’s roughly twice the percentage held by peer banks, according to analysts, making the segment a possible source of risk during stress tests.
In the Fed’s late 2020
The results were “data points” that “suggested that there might be more capital-friendly ways to participate in the CRE industry,” King said. M&T’s next Fed stress test is scheduled to take place in 2022.
As more loans get directed to M&T Realty Capital — and as more CRE loans run off the bank’s books — the increase in fees should offset the decrease in CRE-related net interest income, King said.
The situation with the CRE loan portfolio “is a capital efficiency issue rather than a capital constraint,” Foran wrote in his research note. He called the book “a bit of a capital hog” that “gets hit hard on the stress tests.”
M&T will still consider new originations of construction loans, but it may choose to look outside the bank to fund permanent mortgages and other forms of real estate lending, King said.
“What we got in December 2020 was a data point, and it’s informing our thinking,” King said. “And it’s not telling us that we want to never do another CRE loan as long as we live, but it said to us that there are certain asset classes and certain types of loans and how long they might exist on [the] balance sheet that carry a different loss assumption and therefore a different level of capital that you need to support them.”
“And so we’ll look at the mix of assets that we have on our balance sheet and be thinking, like we always do, about how to optimize returns and what’s the best use of our shareholders’ capital.”
M&T reported third-quarter net income of $495 million, up 33% from the same period in 2020. End-of-period loans totaled $93.6 billion, down from $98.4 billion in the year-ago period as a result of declining commercial loans.
Nonaccrual loans of $2.2 billion were unchanged from the prior quarter, but up 81% compared with the same period last year. The increase reflects the pandemic’s ongoing impact on borrowers’ ability to make their payments, especially on loans to companies in the hospitality sector, the bank said.
M&T continues to await approval from the Fed to complete its pending
Announced in February, the $7.6 billion deal
In response, M&T pledged to retain about 80% of People’s United workforce and to turn its headquarters building in downtown Bridgeport into M&T’s New England regional headquarters. M&T has also committed to employing at least 1,000 people in Bridgeport within a year after the systems conversion, which is scheduled for February, pending the deal’s approval.
