Expenses, expenses, Hudson City, more expenses.
M&T Bank, long regarded as one of the leanest big banks, reported another quarter of rising expenses as it tries to overhaul its Bank Secrecy Act compliance functions to satisfy regulators. Meanwhile, its agreement to buy Hudson City Bancorp remains stuck in limbo.
With costs spiking for a second straight quarter, analysts wanted to know when expenses would crest. During a nearly 70-minute conference call to discuss quarterly earnings, a dozen analysts tried to mine some detail to determine as to how much longer expenses would be elevated and how much higher they could go.
"Expenses are coming in a lot higher than anyone would have thought," Brian Klock, an analyst at Keefe, Bruyette & Woods, said in an interview. "I characterized the last quarter as an un-M&T-like quarter, and now we have another un-M&T-like quarter. We're trying to get some color on how long on it is going to last."
In the meantime, M&T's sidelined purchase of Hudson City has become a focal point for bank consolidators worried about the new regulatory environment for acquisitions, especially those that are deemed systemically important financial institutions.
"Any bank that is a SIFI or wants to be a SIFI is paying attention to M&T right now," Klock said. "What's happening to M&T has become another M&A risk."
The regulatory process is always uncertain and approval is never guaranteed, Rene Jones, M&T's chief financial officer and vice chairman of its $85 billion-asset bank, said in an interview. The key, he added, is to find deals where the rationale is rock solid.
"We've historically not entered into an acquisition that wasn't in the best interest of both sides. If there are sound economics, a bump in the road does not result in any impact on those transactions," Jones said. "We've stepped back and looked at the same facts and it makes the same sense as it did at the outset."
Several analysts agreed that the deal still makes sense, despite the delay. Late last month, the companies said they were pushing the deal's closing deadline back to the end of 2014. Despite efforts to learn as much as possible about the outsized expenses, it appears analysts are trying to be understanding. M&T is considered among the nation's best-run banks and most savvy acquirers, so some of the empathy involves goodwill.
"I think everyone is giving them the look back of history," said Daniel Marchon, an analyst at Raymond James. "They can say, 'We've adapted, we've integrated well, and in the face of adversity we yet again have to adapt and we have to change.'"
It helps that, although expenses increased 12% in the fourth quarter from a year earlier and earnings missed analysts' expectations by 17 cents, M&T reported decent loan growth and an 18% return on tangible equity.
"It is hard to take them to task," Thomas Alonso, an analyst at Macquarie, said. "At the end of the day, they have very little control over this and it would be one thing if it was a huge drag on earnings. Sure, it is knocking returns down some but, at minimum, their results are in line with their peers. If we're frustrated, they're frustration is an order of magnitude higher."
Ultimately, analysts seeking guidance on when expenses will taper left the call with many questions left unanswered. Jones said M&T has committed to building an infrastructure that is going to stay competitive, adding that executives "don't spend a lot of time trying to add up how much it is going to cost."
M&T's current disclosures are acceptable for now, Klock said, but executives can expect more pressure to follow if there are more quarters of highly elevated expenses. "They've done their best to provide the best info they could knowing how politically charged this topic is," he said.
"The last thing they want to do is say something that will get them in trouble," Klock added. "The next couple of quarters are going to be key. When is the expense line going to come in? We will need a finer point on this."