Is M&T Bank share a purchase?
Assets of $ 138 billion M&T Bank (NYSE: mountain biking) based in Buffalo, New York, has had a difficult year as the coronavirus pandemic has hit several of the industries and markets to which it lends. Until recently, the stock was down more than 40% since the end of 2019. However, recent news by Pfizer that its coronavirus vaccine was over 90% successful in early trials, spiked M&T stock by more than 25% on the same day. While this is a tricky investment right now, the bank may have taken the leap. Here’s why.
An efficient bank
Before the pandemic, M&T Bank was considered one of the most successful bank stocks. He consistently produced strong returns for investors and managed expenses very well. It also has a strong deposit franchise with over 36% of its deposits coming from non-interest bearing sources, meaning the bank does not have to pay interest on them. At the start of the year, the bank was trading at 226% of tangible book value.
But when the coronavirus hit in March, it hit New York and several of M&T Bank’s major markets hard. It also hurt sectors where M&T had a decent amount of loan exposure. The bank currently holds 4% of its total loan portfolio in the struggling hotel sector, 5% in retail and an additional 5% in office loans, which are holding up well at the moment but could have a difficult path to follow. monitor if labor from home trend and coronavirus continue long term.
And while the bank is coming off its best quarter of the year, it still built up reserves in the third quarter, and it has seen unrecorded loans – those that haven’t received payment for more than 90 days – increase from the second quarter, which is not a trend currently observed by most banks. Meanwhile, 68% of the bank’s total hotel portfolio has been deferred, while 20% of the retail portfolio has also been deferred.
The good news is that many of these loans have very high loan-to-value (LTV) ratios, which show you how much money, or equity, the borrower has currently invested in the loan. The total LTV of the hotel portfolio is 53%, which basically means that borrowers have paid 47% of the total volume of loans due and have 53% remaining to repay. The LTV for hotel loans in New York, a market that worries many investors right now, is 43%, which means borrowers have collectively paid off more than half of the loans in New York. With this amount already invested in the properties, borrowers will be incentivized to continue making payments due to the large investment they have already made. On the retail side, the LTV situation is similar and office loans also appear to be holding up, with only 7% of M & T’s office loan portfolio currently deferred.
Things are improving
There is certainly some risk with M&T Bank, and there could still be significant losses in the hotel and retail portfolios. But strong LTVs are a good sign, and it’s historically a very well-run bank. Watch the news concerning a COVID-19 vaccine with caution, because the sooner one can start to be distributed, the sooner the bank’s hotel and commercial borrowers can start generating more business and hopefully get back to being up to date with their loan repayments. But if it takes too long, these borrowers could end up in trouble. The huge increase in M&T shares after the Pfizer news shows how much advantage this stock has if the economy can begin to recover significantly in 2021.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.