M&T sees 'upward trajectory' for interest income, margin

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UPDATE: This article includes comments made during M&T Bank's earnings call.

M&T Bank in Buffalo, New York, said it continued to diversify its loan portfolio during the third quarter, growing consumer and business lending while allowing the proportion of commercial real estate credits to decline.

Net income rose to $721 million, or $4.02 a share, from $690 million, or $3.98 a share, a year earlier.

The $212 billion-asset regional bank said its average loans and leases increased 2% from a year earlier — and rose slightly from the prior quarter — as its commercial and industrial credits grew. This included financial and insurance industry customers, motor vehicle and recreational finance dealers and service industry clients. The bank also grew its consumer portfolio, with advances in its recreational finance and automobile lending.

The growth in those areas more than offset a 15% year-over-year decline in CRE loans. The bank has been consciously scaling back its CRE footprint for several quarters, seeking to reduce its concentration in the sector. The CRE portfolio still makes up about 21% of the bank's loans.

Chief Financial Officer Daryl Bible said during a call with analysts Thursday after posting results that a "resilient" economy and "healthy" job market continue to support business and consumer loan demand. He said M&T expects that, after a multi-quarter run of elevated but declining inflation and high interest rates, "we see a soft landing scenario as having the highest probability" for the economy.

"We expect continued loan growth" in the current quarter, even with further declines in CRE balances likely, Bible said. He anticipates net interest income momentum to endure. "In the markets that we serve, we have a lot of good things going on, and I think there will be a lot of growth needs over time."

"I feel good that we have an upward trajectory on margin and net interest income," Bible added.

M&T and many of its peers have retreated from CRE amid the fallout of the coronavirus pandemic, which resulted in increased vacancies in urban office, multifamily and retail properties. The Federal Reserve's high interest rate policy of the past couple of years compounded matters by making loan payments higher for landlords. This led to increased loan delinquency rates.

Bank CRE mortgage delinquencies continued an upward climb through the second quarter. That extended a trend that began in the final quarter of 2022, according to Trepp analyst Emily Yue. The overall delinquency rate rose to 2.01% in the second quarter from 1.83% the previous quarter, "reflecting mounting pressure on the commercial real estate sector," Yue said.

Bible said M&T would continue to modestly decrease its CRE book for "at least a couple more quarters." The bank, he said, aims to "operate with about 20% of our loan book being in CRE."

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In comments at a September conference, however, Bible said Federal Reserve interest rate cuts would lower borrowing costs and could boost loan demand in coming quarters. This could also lower costs for CRE borrowers with adjustable-rate loans and minimize the likelihood of credits souring. Lower rates could gradually reduce banks' deposit costs, too, supporting the margin between what banks pay for funding and earn on lending.

The Fed cut its benchmark rate by 50 basis points last month and signaled that several more reductions were likely later this year and next year.

Increased lending that is funded with more favorably priced deposits would bolster M&T's and other banks' net interest income and potentially overall profitability.

M&T reported net interest income of $1.73 billion for the third quarter, down from $1.78 billion a year earlier.

Its net interest margin was 3.62%, up 3 basis points from the prior quarter but down 17 basis points from a year earlier.

The bank said its nonaccrual loans as a percentage of loans outstanding declined to 1.42% from 1.50% the previous quarter and 1.77% a year earlier.

Provisions for credit losses fell to $120 million from $150 million a year ago.

"I do feel really good" about the trajectory of credit quality, with vulnerable loans likely to dwindle in number late this year and next, Bible said.