(MTB) M&T Bank Corporation Earns Fitch Rating Actions

Fitch Ratings has affirmed M&T Bank Corp.‘s (MTB) long- and short-term Issuer Default Ratings at ‘A-‘ and ‘F1,’ respectively. The rating action follows the closure of M&T’s acquisition of Wilmington Trust Corp. on May 16, 2011. The rating outlook remains Negative. The proposed corporate restructuring of M&T announced on June 30, 2011 led to the rating affirmation.

M&T’s recently accomplished the purchase of Wilmington Trust backed by capital raises. According to the rating agency, the capital infusion should help overall capital levels to be consistent with those that M&T had at the end of third quarter 2010 (tangible equity to tangible asset ratio of 5.96% and a Tier 1 risk-based capital ratio of 9.45%). Yet, M&T’s capital ratios are still at the lower range of the rating agency’s rated peer group.

Moreover, M&T also stands to gain a greater banking franchise from the expanded presence that the Wilmington acquisition gives. The larger trust business should support its top line while bottom line can be improved by reducing overall costs through the rationalization of combined operations.

That the company has performed comparatively better than many of its peers since the beginning of the financial crisis was also acknowledged by Fitch. Results have shown improvements in the recent quarters with lower provisioning, reduced interest expense and modest loan growth.

However, the Negative rating outlook reflects issues related to its real estate exposure and its lower-than-peer-group capital ratios. Plus, the rating agency had categorized Wilmington as a troubled institution prior to its acquisition by M&T. Therefore, going forward, rating actions will depend on whether Wilmington loans are marked appropriately and on M&T’s integration efficiency.

Holding M&T is Worthwhile

M&T’s first quarter operating earnings of $1.67 per share exceeded the Zacks Consensus Estimate of $1.41 aided by an increase in net interest income on the back of net interest margin expansion, coupled with a substantially lower provision for credit losses. Credit quality challenges have also lessened.

Going forward, we believe that strategic acquisitions should help earnings augmentation. The Wilmington Trust Corp. acquisition added 55 branch locations, 225 ATMs and $10.7 billion in assets, and is expected to be accretive to the company’s earnings going forward.

The repayment of the bailout money, though in part, is essentially a positive step as upon full repayment, M&T can escape restrictions on both financial and executives’ pay package flexibility that it was subject to upon being a bailout receiver.

However, the protracted economic recovery remains a headwind and top-line growth at M&T is expected to remain somewhat limited in the coming quarters. We are also concerned about the regulatory issues. The overdraft legislation is expected to result in a decline in service charges on deposit accounts.

Therefore, our Neutral recommendation on the shares remains in place. Shares of M&T Bank Corp. currently retain the Zacks #3 Rank, which translates into a short-term Hold rating. Currently, M&T’s peers such as Comerica Inc. (CMA) and Fifth Third Bancorp (FITB) also retain the Zacks #3 Rank.

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M&T BANK CORP (MTB): Free Stock Analysis Report

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