Real estate lender’s bleak outlook and earnings decline perplexes analysts

Smaller profits at M&T Bank, but troubled loans have peaked

M&T CFO Darren King (The Org and iStock)
M&T CFO Darren King (The Org and iStock)

M&T Bank’s quarterly earnings fell, and the firm gave a bleak outlook for commercial real estate lending — in contrast to rising profits and optimism at other commercial real estate lenders.

The bank reported diluted earnings of $3.37 per share in the fourth quarter of 2021, down from $3.52 a year ago. Net income also dipped. M&T reported $458 million in revenue, a 2.7 percent decline from $471 million in the same period last year.

Driving those declines was a drop in lending. Across the board, M&T reported average loans decreased by $2.1 billion or 2 percent from the previous quarter. The forgiveness of PPP loans that bolstered the bank’s previous year performance was primarily to blame, said Darren King, the Buffalo-based bank’s chief financial officer, on an earnings call Thursday.

Commercial and industrial loans dipped by $1.4 billion, mirroring the $1.6 billion decline in PPP loans, which contributed to that category. Commercial and residential real estate lending didn’t fare well either. Commercial real estate loans dipped by $830 million quarter-over-quarter and residential real estate by $89 million.

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Community banks such as M&T had a hard year in commercial real estate lending. While Manhattan investment sales have recovered in recent quarters, annual sales still hover below pre-pandemic levels.

Still, other real estate lenders including Signature Bank see the market’s recovery as an opportunity to expand. In an earnings call this week, the multifamily-focused bank celebrated another quarter of record-breaking profits and said it would ramp up its commercial real estate lending.

While Signature lends primarily to apartment building owners, M&T’s portfolio is stacked with hotel and retail loans. Midway through the year, the city’s lodging market entered an economic depression, according to the American Hotel & Lodging Association. Retail, meanwhile, is staging a slow comeback.

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M&T sees a steeper drop in commercial real estate lending ahead.

“The pandemic resulted in a slow pace of new commercial real estate transactions over the past two years, putting pressure on balance growth,” said King, the CFO. “This leads us to expect low single-digit declines in CRE balances in 2022.”

Analysts on the earnings call were perplexed. Matt O’Connor, a managing director at Deutsche Bank, put it bluntly: “You’re the only bank I cover where they’re talking about deposits down, loans down, securities not really growing … It doesn’t feel right considering where the economy is.”

King countered by pointing to the growth outlook for commercial and industrial lending, driven by floorplan loans for car dealerships, as well as residential real estate and consumer loans, which he said should drive “mid-single-digit growth.” He also said the bank does not expect a decline in core deposits.

The bank did report that criticized loans, those in danger of defaulting, peaked in the third quarter of 2021. Mid-way through last year, the bank’s late-stage delinquent loans, predominantly residential real estate debts, had more than doubled to $1.1 billion.

King said the comeback in the hotel and retail sector reduced M&T’s roster of troubled loans in the fourth quarter, noting that occupancy rates at suburban hotels are strong. City hotels’ bookings are off pandemic lows, King said, but the sector is still grappling with lower rates of business travel.

“You make it sound dire,” King said, responding to O’Connor. “When I look forward to 2022, I feel as optimistic as I’ve been in the last 18 months.”