The lender's fourth-quarter guidance assumes the Fed raises rates again, but management describes the balance sheet as roughly neutral to short-term rates, and September's increase trimmed its margin. Earnings beat; net interest income and the stock did not.
M&T Bank's forecast for the fourth quarter includes a Fed rate increase in December. The bank's own explanation of its earnings suggests the increase is not what drives the forecast.
The regional lender guided fourth-quarter net interest income, on a taxable-equivalent basis, to $1.83 billion to $1.85 billion, and management said the plan assumes one Fed increase in December. Regions Financial made the same assumption in its outlook on Friday. Third-quarter taxable-equivalent net interest income was $1.805 billion, so the guidance implies growth of about 1.4% to 2.5%, by this publication's arithmetic.
What the bank says moves its income
Asked about rate sensitivity, Chief Financial Officer Daryl Bible said: "sensitivity on the short end, we're relatively neutral, maybe a touch liability-sensitive." He added that "the curve is steeper and that's a good guy for us."
That matters for reading the guidance. A bank that is neutral or slightly liability-sensitive does not gain much from another short-term increase, and may lose a little. The third quarter showed it: M&T's net interest margin fell to 3.65%, and management attributed 2 basis points of the decline to funding costs after September's increase.
The lift management points to instead is repricing. About $6 billion of securities and $10 billion of fixed-rate loans are due to roll into higher yields, and that happens whether or not the Fed moves in December. The December increase is a planning assumption in the outlook, not the engine of it.
A mixed quarter
Net operating earnings of $5.08 a share beat the $4.93 average estimate, and revenue was broadly in line. On a GAAP basis, third-quarter net interest income of $1.79 billion fell short of the $1.82 billion analysts expected.
The loan book moved in the wrong direction. Criticized loans rose by $245 million in the quarter and nonaccrual loans by $90 million, management said, with problems in office real estate, assisted living and a credit to an auto leasing platform. Management called a 17% return on tangible common equity in 2027 attainable but said it would be challenging if higher rates persist.
Put together, higher short-term rates cost M&T a little margin and strain some borrowers, while a steeper curve and maturing fixed-rate assets help. That is a different profile from a bank that simply earns more each time the Fed tightens.
M&T shares traded at $213.94 in early afternoon, down 2.2%, the weakest showing among the regional banks that reported Friday.
Market implications
One reading is that the guidance is sturdier than its headline assumption. Because the growth comes mainly from assets repricing, M&T could hit its range even if the Fed holds in December, and the earnings beat shows the core franchise is performing.
A second reading is that the quarter's pressure points are the ones that higher rates make worse. Funding costs took margin after the September increase, problem loans rose in office and health-care property, and management itself flagged that persistent high rates would make its 2027 return target harder to reach.
What to watch
The Fed's Oct. 28 decision and statement, M&T's fourth-quarter taxable-equivalent net interest income against the $1.83 billion floor, and the trend in criticized loans. If the Fed holds in December and M&T still reaches its range, the repricing reading will have been right.