M&T's profits plunged. Here's why it says brighter days lie ahead.

Joe Buglewicz/Bloomberg

M&T Bank in Buffalo, New York, grappled with higher funding and credit expenses in the fourth quarter, posting weaker earnings. But its outlook for the year ahead calls for gradual improvement as interest rates level off and then begin to decline. That should be coupled with slower but still healthy economic activity, likely easing pressure on deposit costs and boosting loan demand.

Daryl Bible, the $208 billion-asset regional bank's chief financial officer, told analysts Thursday that M&T anticipates a so-called soft landing this year — a development that would see the economy weather the one-two punch of inflation and high interest rates without tipping into a recession. 

Bible noted on the company's earnings call that Federal Reserve rate hikes last year and in 2022 proved effective in taming pandemic-induced inflation without paralyzing the economy. Now, this year policymakers are expected to begin reducing rates to support a steady increase in activity as the year wears on.

The combination of declining rates and economic momentum could spur new investments — and loan demand to finance them — while simultaneously lowering the rates banks pay on deposits. Increased lending that is funded with more favorably priced deposits would bolster M&T's and other banks' net interest margins and profitability. Bible referred to a strong labor market that fueled job gains throughout 2023 and supported the consumer-driven economy.

"We are encouraged" by "continued job gains as well as wage growth above inflation that helped drive consumer spending," he said. "Our outlook incorporates the forward curve that has multiple 25 basis-point Fed cuts in 2024."

M&T expects taxable net interest income to be in the $6.7 billion to $6.8 billion range and net interest margin to hover around 3.5% this year. Both would represent modest declines from 2023 levels, yet the pace of decline would ease and set a new foundation from which to grow, Bible said.   

"I would tell you that deposit betas may be close to peaking" and "our net interest margin is close to bottoming out, maybe in the next quarter or two," he said. "So I feel actually pretty good that we'll be able to start to grow NII maybe towards the second half of the year and definitely into 2025."

The bank also anticipates that charge-offs could level off and average around 0.40% of average loans this year.

M&T reported a fourth-quarter charge-off ratio of 0.44%, up from 0.29% the prior quarter and 0.12% a year earlier. The increase was largely driven by three office-related charge-offs — one each in New York City, Boston and Washington, D.C. Office property owners struggled in 2023 amid high vacancy rates linked to remote work trends. The bank also reported charge-offs related to an online retailer and another on a loan to a recreational vehicle dealer.

M&T reported net interest income of $1.7 billion for the fourth quarter, down 3% from the linked quarter and down 6% from a year earlier. These declines were driven by higher interest rates on deposits that were only partially offset by increased loan yields.

Net interest margin was 3.61% for the final quarter of 2023, down 18 basis points from the prior quarter and down 45 basis points from a year earlier.  

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Average loans and leases increased slightly — less than 1% — to $132.8 billion from the prior quarter, with growth in consumer and business loans outpacing declines in both commercial and residential mortgages.

Home lending, however, could be among the first categories to benefit from declining interest rates. There is pent-up demand for housing and long-term rates already have begun to creep lower. Freddie Mac said Thursday that the 30-year fixed-rate mortgage averaged 6.6% this week, down from 6.66% the prior week and down from a 2023 peak above 8%.

"This is an encouraging development for the housing market, and in particular first-time homebuyers who are sensitive to changes in housing affordability," said Sam Khater, Freddie Mac's chief economist.

M&T Bank's fourth-quarter net income declined 37% from a year earlier to $482 million. It reported earnings per share of $2.74, down from $4.29.

Earnings were dragged lower by the higher funding costs and a large one-time fee that M&T and other lenders were required to pay to replenish the Deposit Insurance Fund following the failures of multiple regional banks in 2023. M&T reported an expense of $197 million tied to the special assessment.