M&T Bank reassured investors Monday that certain portions of its commercial real estate portfolio are improving, but it warned that changes in work culture may put the office sector under stress for years to come.
Hotel loans are becoming safer as consumer travel normalizes, and retail buildings are getting a boost from a rebound in brick-and-mortar shopping, said Darren King, chief financial officer at the $202.9 billion-asset bank. He also noted that multifamily residential loans are showing strength.
But stress in the office sector “will play itself out over multiple quarters, if not multiple years,” King said during a call with analysts after the Buffalo, New York-based bank reported its first-quarter earnings.
M&T’s latest updates about its commercial real estate exposure included both good news and bad news, said Brian Foran, an analyst at Autonomous Research.
Improvements in the hotel, multifamily and retail sectors are helping M&T, he said, but the regional bank also has relatively large exposure to the office sector.
“There’s fairly broad-based challenges in commercial real estate right now, and office is at the epicenter of it,” Foran said during an interview. “By definition, this is a slow-moving market with slow-moving problems. This is something that’s going to bleed through quarter after quarter.”
M&T is one of the regional banks that has come under a microscope as concerns have grown about the impact of rising interest rates and changing work patterns on the commercial real estate market.
While estimating office-related commercial real estate losses is “a little bit tricky” due to the lack of sales and market pricing, the portion of the bank’s portfolio that’s criticized is around 20%, which is “up slightly but not dramatically” from what M&T reported last quarter, King said.
King also said that “half to two-thirds” of the $120 million in credit-loss provisions that the bank recorded during the most recent quarter were tied to the bank’s CRE portfolio. Approximately $200 million in office loans will be maturing at M&T in each of the next two quarters before that number drops by the end of the year, according to the bank.
Between January and March, the bank recorded a $30 million increase in net charge-offs from the previous quarter, which King said was partially related to two troubled office properties.
“It’s a concern, we’re watching it,” King said. “Our portfolio is pretty broadly spread across our footprint.”
King also indicated that in the coming quarters, M&T plans to reduce its focus on commercial real estate loans.
The bank’s $132.9 billion loan portfolio is split by around one-third each between commercial and industrial loans, consumer loans and CRE loans. M&T expects this mix to “shift slightly” toward commercial and industrial loans in the near term, King said.
“There’s not a lot of activity that’s really happening” in commercial real estate, King said. “There’s not a lot of new construction.”
On the other hand, in the commercial and industrial sector, he said: “We’ve seen fairly broad-based growth, whether it’s by geography or by industry type.”
M&T is not the only bank sending warning signs about CRE. On Friday, Wells Fargo CFO Michael Santomassimo said that the office sector “continues to show signs of weakness.”
M&T also reported shifts in its deposit mix that are similar to those disclosed by other banks. The bank’s total interest-bearing deposits rose 1% to $99.1 billion from last year’s fourth quarter, while noninterest-bearing deposits declined by 8.5% to $59.9 billion.
Year-over-year comparisons were skewed by M&T’s purchase of People’s United Financial, which closed in early April 2022.
M&T reported $702 million in net income for the first quarter, an 8% decline from the fourth quarter of last year. Net interest income remained unchanged from the fourth quarter at $1.8 billion.
Noninterest income fell 14% quarter over quarter to $587 million, driven by lower revenue following the sale of M&T’s insurance agency, reduced distributions from the bank’s mortgage financing company BayView Lending Group and a decline in mortgage banking and servicing income.