M&T Bank stock looks like a buy
Like a child waiting for a birthday present only to find he has a sweater instead of a puppy, bank investors are discovering that the rate hike isn’t the gift they were hoping for.
Rising rates are generally good for banks. They often mean that banks can charge more for loans and earn a higher net interest margin, the difference between the rates at which they borrow and lend. As interest rates rise, that means bank profits should rise. The Federal Reserve typically enters a bullish cycle when there are still plenty of avenues for economic growth, so investors generally don’t have to worry about an impending recession, which would make new lending riskier and default rates on older loans would rise.
This is not your usual touring cycle. Even the Fed acknowledges that it is starting late and that rate hikes of half a percentage point or more are possible in future meetings. This late start also means that the so-called yield curve – the difference between short and long-term rates – is very flat in places. If short rates were to rise above longer-term rates, this would “invert” the curve, signaling an impending economic slowdown. Add to that worries about the Russian-Ukrainian war, and it’s no wonder investors have been reluctant to push bank stocks higher. the
SPDR S&P Bank
exchange-traded fund (ticker: KBE) has gained 2.3% since the Fed raised rates on March 16, even as the
But even without a recession, investors may flag other worries. Jefferies analyst Ken Usdin notes that while rising rates may increase net interest margins, it also drives down the value of bank assets as bond prices move in the opposite direction of yields. This could lead to lower tangible book values for banks and, for large banks, it could mean lower capital ratios and less cash to return to investors.
Banks have realized this, so they have moved more of their assets to the “held-to-maturity” tranche, where they do not need to mark-to-market prices. Still, this is another possible headwind for the sector. “Rising interest rates are a double-edged sword for banks,” Usdin writes.
None of this means banks are going to crash anytime soon – they have in fact held up better than the broader market this year. It’s just that they’re not the slam dunk they might otherwise have been. For investors, this means being more selective than just buying the SPDR S&P Bank ETF.
(MTB) is a stock that looks interesting. The company’s acquisition of
People’s United Financial
(PBCT) has just been approved by the regulators. It is expected to close by April 1 and its closing should allow M&T to invest more cash, notes Deutsche Bank analyst Matt O’Connor.
That might not sound like a good thing, given rising rates. But buying bonds now isn’t such a bad option. “Even two-year Treasuries are offering rates over 2% right now, meaning better yields and relatively low duration risk,” O’Connor writes. He expects M&T Bank shares to hit $200, up 9% from Friday’s close of $183.57.
Citigroup’s Keith Horowitz, meanwhile, added M&T Bank to the bank’s priority list, citing approval of the deal, its ability to boost profits and its “strong credit profile”. Its price target of $220 suggests a 20% upside from Friday’s close.
As M&T shares start to break out, we are betting on it.
Write to Ben Levisohn at [email protected]