M&T Bank (NYSE:MTB) has seen continued growth through acquisitions while its organic growth performance has been kind of overshadowed. The acquisitions of Hudson City Bancorp in 2015 and Wilmington Trust in 2011 were of prime importance as these financial institutions now constitute more than 40% of M&T's deposit base. Although the stock has enjoyed premium valuations by and large with not so big profits, we initiate with a neutral view on M&T Bank, and suggest investors to be cautious.
M&T Bank has had strong growth over the past year, but most of its growth has been through the Hudson City acquisition, which makes it very difficult to determine its organic growth. It is even very hard to make y/y comparisons for some specific metrics like net interest margin. That said, the bank's profitability decreased due to the costs associated with the acquisition, and the return on average equity dipped to 7.5% in 4Q 2015. We have seen a recovery ever since, however, M&T Bank's ROAE is still standing below 9%, which we estimate to be the cost of capital for banks, but more importantly, it lagged the peers. Still, the stock is trading in line with the peer group on a P/BV multiple basis. What is more, the bank being currently valued at 17.8 times its expected 2017 earnings makes us believe that the stock appears to be a bit overvalued. We also believe that there are some unfavorable developments that could potentially hurt earnings in the near future.
