Why M&T says it can withstand lower interest rates

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An executive from M&T Bank in Buffalo, N.Y., sought to assure investors Monday that it can overcome the low-interest-rate environment threatening the industry thanks to balance-sheet-management techniques it has aggressively deployed and other practices.

First, Chief Financial Officer Darren King said during the Barclays Global Financial Services Conference in New York, M&T has extensively used rate hedges. Second, its earning-asset mix has been maintained to produce high yields that are sustainable. Finally, the $125 billion-asset M&T has kept a lid on deposit rates, so it will not need to drastically cut rates and risk chasing off customers, he said.

His message contrasted with that of Wells Fargo, which lowered a key profitability target on Monday for the third time in five months because of changing rate conditions. Banks will report third-quarter earnings starting in mid-October.


M&T should be able to protect its net interest margin from narrowing too much even if the Fed keeps cutting rates, King said.

“We tried to run the bank to be just a little bit better than peers on net interest margin,” King said. “We are able to slightly outperform in good times and outperform by a wide margin when things get rough.”

M&T is scheduled to report earnings on Oct. 17.

The company began its hedging program in 2016 when interest rates on loans began to rise along with the Fed’s rate increases; the Fed began a series of nine rate hikes in December 2015. But few banks were raising deposit rates. which raised a red flag among bank management.

“Our concern was that something could happen,” King said. "At the time there were a lot of missiles being launched from North Korea which were causing anxiety … [so we] put on some hedges to just … give us a little room if rates dropped."

M&T has accelerated its use of derivatives and had $17.8 billion of hedges in force at June 30, up from $7.6 billion a year earlier.

The company has carefully maintained the makeup of its loan and securities portfolios, King said. M&T's commercial and consumer loans have grown, and it allowed residential mortgages obtained from its 2015 acquisition of Hudson City Savings Bank to run off its books. M&T has also lowered its holdings of investment securities.

“[We have been] trying to build a margin that was both toward the top end of the peer range but also sustainable,” King said.

King also argued that M&T has held down deposit costs, even though it has had to raise rates in recent quarters to remain competitive. About 33% of M&T’s deposits paid no interest at June 30, compared to a peer aggregate of 27%, according to M&T. And its total deposit costs were 0.73%, which was 19 basis points lower than the median of its peers.

“Our deposit costs [had] a little bit of an increase, but at a yield that is comparable or better than peers,” King said.

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