HCBK (MM)

On August 28, rating agencies – Fitch Ratings and Standard & Poor's (S&P) – affirmed their ratings on M&T Bank Corporation (MTB). Fitch affirmed the long-term and short-term Issuer Default Ratings (IDRs) of M&T Bank at ‘A-’ and ‘F1,’ respectively.  In addition to this, the rating outlook has been maintained at ‘Stable.’ Further, S&P has affirmed its rating of A-/Stable/A-2 on the company.

However, Moody's Corp. (MCO) has placed M&T Bank on watch for a possible downgrade, following the announcement of the acquisition deal. Moody’s is of the idea that the deal will expose the company to a sizeable amount of residential mortgages present on the balance sheet.  Moody’s is currently reviewing the mortgage portfolio for possible losses against the M&T Bank’s estimated credit mark of 1.5% and its general capital position.

Recently, M&T Bank announced a deal to purchase the New Jersey-based Hudson City Bancorp, Inc. (HCBK). According to Fitch and S&P, this deal is highly advantageous to both banks. The acquisition will be accretive to M&T Bank’s earnings in 2013.

Moreover, this would encourage M&T Bank’s Tier 1 common capital ratio to enhance by 30-40 basis points. With this deal, the company would also be able to expand its footprint in the New Jersey region.

The stable outlook bears testimony to M&T Bank’s robust financial and credit performance amidst gloomy economic backdrop. Further, the company’s strong varied revenue streams, highly capable management and goodwill have helped the rating agency retain this outlook.

However, lower capital levels compared to its peers, huge amount of trust preferred securities in its capital, considerable presence of deferred tax assets as well as downbeat results from its Bay View Investment and its private label - MBS, would likely be the offsetting factors.

We agree with Fitch and S&P’s view that the acquisition will assist M&T Bank to attain the required minimum Tier 1 Common ratio, stemming from the implementation of the Basel III rules. Further, it will enable the company to build its capital position stronger like that of its peers. However, concerns raised by Moody’s are also food for thought.

If the company possibly goes aggressive on its capital management strategy or opts for another acquisition, which could pressurize the present capital position, even Fitch and S&P possibly may downgrade the ratings.

M&T Bank currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the shares.

 
HUDSON CITY BCP (HCBK): Free Stock Analysis Report
 
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