Good morning and welcome to day two of the 16th Annual Morgan Stanley U.S. Financial Conference. I'm Manan Gosalia, the Midcap Banks analyst. We have M&T kicking off for us. I'll get our usual disclosure out of the way, which is for important disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we're delighted to have with us today Daryl Bible, CFO of M&T. Daryl, welcome back.
Thanks, Manan. Thank you for having M&T here. Thank everybody in the audience for being bright and early and here to hear about M&T.
That's great. We have a lot to look forward to. Daryl, maybe let's start with the environment. There's significant focus on tariffs. We've had some time to digest the announcements. We've had some positive headlines. Can you talk about what you're hearing from your customer base? Are borrowers still on pause or are things picking up a little bit?
Yeah, I think the way I would kind of frame it up, when the tariffs came out during Liberation Day or whatever, and the shock that was in the system, that seems has abated and a lot has changed. I think sentiment is moving much more positive from that. I think our customers are eager to make investments in their businesses, make acquisitions, and do all that. I just do not see a lot of it happening this quarter. I think it is seen maybe potentially building as the year plays out. We got some positives coming potentially with a new tax bill coming maybe later in the next month or two. That would be real positive. It seems like they are making a lot of good progress on a lot of the tariffs.
I think we're hopeful for a really strong second half of 2025 for us in the industry.
It sounds like things are going the right way for loan growth. And we'll dig in a little bit more there. But from a credit perspective, is there anything you're specifically watching? I know you've flagged industries like retail, trade, manufacturing, construction. Is there anything you're seeing there?
Yeah, so we follow about a group of 700 customers that are in those categories. In that grouping, you'd expect you have a mixed bag there overall. That is what you have. You have some that are, we've probably downgraded less than 10 to really lower levels. Maybe three have actually went into criticized from that perspective. We've also upgraded some credit. I firmly believe that as time goes on, our customers, U.S. business people, will continue to adapt and make adjustments. The ones that I think we're seeing are successful are the ones that were successful during COVID. They were able to adjust supply lines and adjust their businesses. I think those are the same folks that are taking that same positive mindset and making it happen for their companies now.
Are there any specific industries that you're talking about, or is it more broad-based?
Yeah, I think it's just broad-based. I think it's what they can control and how they want to deliver. Just having that positive mindset, they will figure it out and overcome. It's kind of the U.S. way of doing things.
All right, perfect. Before digging into some of these other topics that we had on the list, you released a slide deck last evening with some details on the guide quarter to date. Can you talk about some of the drivers for us?
Yeah, so we really did not change any guidance for the year. If you look at the second quarter, I think we are very comfortable with where consensus is coming in. We feel that is in the ballpark of what you expect out of us with one month to go from that perspective. I think overall, NII is coming in as expected, margins coming in as expected within our guide. Even with modest loan growth, I think we are still delivering from that. Deposits continue to be positive for us, growing that. Fees continue to be a strong accelerator for us. It is growing nicely. Expenses continue to be in check. From a credit perspective, net-net overall, we are at a point now where we get a lot of financial statements from our corporate borrowers from year-end.
We really review most of that in the second quarter rather than the first quarter. We are seeing many more upgrades than downgrades in there, which is also a positive sign for us.
Great. Lots to dig into. On the loan growth side, I know you call out positives in the consumer portfolio. Can you talk a little bit more about that?
Yeah, if you look in the consumer portfolio, first and foremost, our strategy for the last several years is really to de-emphasize CRE and become more diversified. We are doing that by trying to grow CNI and consumer such that right now, CRE is about 19% of the balance sheet. From a consumer perspective, we have seen tremendous growth in the indirect space, both in auto, RV, and marine. We had, I think, our largest month ever in the last month or two, which has really been positive. Consumer side, things are growing well. Even our home equity portfolio is growing, which is really positive. That has not really grown in the last several years. That is growing in the marketplace. I think retail, consumer seems to be very healthy and seems to be moving forward from that perspective.
We're also growing our residential mortgage portfolio, balance sheeting more mortgages. You'll see some growth out of that portfolio this quarter.
It sounds like that's not being impacted too much by the fact that the tenure is up a lot.
No, I mean, from a ten-year perspective, it impacts more in the mortgage area, the refinancing. We aren't seeing a lot of refinancing, probably not a lot of new home building. What we are is we're balance sheeting more on the balance sheet and all that. I think that's positive. Our commercial mortgage business, with the higher tenure, is doing amazingly well. They're beating their plan and performing really strong from that perspective.
Maybe while we're on the CRE side, M&T successfully reduced the CRE concentration. I think you're at about 136% as of last quarter. You've talked about being comfortable with this level of CRE. How are you thinking about CRE originations from here? What are you seeing on the paydown front there?
Our pipelines continue to build. Now, within the pipelines, we're growing most categories with the exception of office. A piece of that pipeline is in the construction book. In construction lending, obviously, you have the line, but it takes 12 to 18 months before you actually see that line get fully filled from that perspective. Pipelines are building there. We're going to be under $136 at the end of this quarter. As we look out, I think that as the year plays out and if we can get more certainty in the marketplace and a lot of good news from the government, I think you're going to have a strong second half of the year. We're hopeful that CRE will be growing by the end of the year.
Right. When you say it takes about 12 to 18 months for these pipelines to come through, it's already been building for several quarters. That's why you see an uptick towards the back half of the year.
Yeah, I mean, we've had more build within the pipeline every month. We are putting more and more on. The construction book is a piece of that. Those will start to fund as the year plays out.
What about on the CNI side? You noted that the sentiment is definitely moving in a positive direction. You're not seeing it just yet in the loan portfolio. How quickly can that change? How quickly can loans come onto the balance sheet?
Oh, I think we know our customers very well. I think we can remove pretty fast from that perspective. We have anecdotally a customer in Baltimore. They want to invest and put more money into a couple of hotels that they operate, I think a $70 million or $80 million loan. They're on pause right now because they're waiting to see what type of traffic is going to come into the hotels and all that. There are a lot of people coiled really to be out there to, I think, invest more once they have a little bit more certainty.
Got it. How would you characterize the level of competition for both CNI and CRE?
It is competitive. It's always a competitive industry. This is no different from that perspective. We are doing a good job. We first start with supporting our customers that we've had for a long time. We're very supportive. We do what we need to to make sure that we can meet their needs. We also are growing and trying to add to that as well. I think people know us in the marketplace. We're out there competitive. We get our fair share of all that. We don't win all of them, obviously. We're going to grow as the market grows in that space. We aren't going to stretch and do anything that's not sound from a structure perspective. We can compete on pricing if we need to and want to from that perspective.
I feel pretty confident that we will continue to deliver that. As the market grows, I think we're going to continue to grow and perform very well.
As I've spoken to some of the banks here, some banks have spoken about spreads coming in a little bit. Some banks have spoken about more competition for new clients rather than existing clients. Is there anything nuanced that you're seeing in your portfolio?
In the CRE space, there is definitely a lot of, there's not as much volume as you would like in that space. There is much more competition in that space. In that space, I think you're seeing it to be really extremely competitive there. CNI, I think, is a little bit less so from that perspective. I think from a CRE perspective, it just tends to be a little bit more competitive. We're winning our share.
Where is this competition coming from? Is it other banks? Is it private credit? I know René wrote a lot about private credit in his annual letter. Can you talk about where you're seeing that competition coming from?
Yeah, I mean, it is obviously coming from other banks. It is coming from non-banks. Private credit is there. It is mainly in the CNI space is where we see them. We have lost some lending relationships from our CNI customers. When that happens, though, we still maintain their deposit relationships, their treasury management revenue sometimes. Depending on how much leverage is put into those companies, we might still retain a senior lending position there or not. It kind of ebbs and flows from that perspective. It is competitive out there. You turn that the other way, private credit is also a big customer of M&T. We do a lot of business with them. We lend to a lot of their structures that they have that they actually use to actually compete against us in the middle market space.
We also have a significant relationship with private credit customers in our ICS corporate trust business in both corporate trust and loan agency. Net-net overall, we probably make much more revenue on private credit than what we lose from private credit right now.
Got it. How do you think about the risk there? I know it's diversified amongst more loans. How do you underwrite that risk?
From an underwriting perspective, that's kind of our bread and butter. That's kind of our history. I would say of all the banks I've worked for in my career, M&T is probably as good or better than any of those in actually analyzing credits. We are really good at underwriting credits, really knowing how that works, how it performs. If you look at our long-term history of our performance in stress times, we're still really strong from that perspective. I think our underwriting, I don't worry about our underwriting piece and all that. I mean, we have really strong credit people. They work really hard. They do the right things from that perspective.
All right, excellent. Maybe we can pivot over to deposits. I think you noted in your slide deck that the deposit trends are strong. I think you said deposits are moving higher quarter on quarter. What are the percentages across the different businesses, commercial, retail, wealth?
Yeah, in the first quarter, we were down in the customer deposits. That's the first time in five quarters. We had some seasonal outflows that were a little heavier than what we expected. It's bounced back in the second quarter. We have really good growth in pretty much all of our businesses, strong growth in our consumer deposits, broad-based, some non-maturity in that space, growing checking accounts, operating accounts really well. Business banking is also having a really good year of growing operating accounts as well as overall customer deposits. Commercial is performing strong. Wealth is an area that is a huge opportunity for us.
If you are a new leader that runs wealth, Lisa Roberts, when you look at our customer base that we have and the amount of loans and deposits that we have from that customer base, she said it should be three times that over that. It is a good opportunity. She is really focused on growing that. I think we are excited to see how that plays out over the next couple of years. If you look at ICS, ICS deposits tend to be a little bit lumpy that we have. They come in and really have a good impact when they come onto the balance sheet. Lastly, in our mortgage area, our escrow deposits, getting that new sub-servicing piece of business that we have as we continue to bring in good escrow deposit growth.
I think we're hitting on all cylinders pretty much on the positive front.
You spoke about averaging a 50% deposit bid as rates come down. This is the first quarter where there is no impact from rate cuts. If we do not get more rate cuts anytime soon, how are you thinking about deposit costs from here?
We trim around the edges. We also run promotions too. It is kind of a mixed bag. I think this quarter will be relatively flat from a deposit cost perspective. It is puts and takes. We cut in certain areas where we think we can still make adjustments. We put special promotions in place. We price for our customers in certain areas and all that. It is kind of a mixed bag. We are doing a good job growing the book. As long as we are growing deposits and it is under our marginal funding curve, that is going to be positive. We can continue to pay off non-core funding from that. If we do not have loan growth, we have loan growth. That is even better from that perspective. I think we have really good discipline.
The treasurer that I have is doing a great job working with all the businesses that we have and making sure that we have the right pricing discipline and how they operate. It is a really smooth-running machine right now.
That's a great segue into net interest margins. Last quarter, I think your NIM was at about 366. You're saying that NIM should be up Q on Q. There's some positive benefits coming from the loan growth side, even a little bit on the deposit side. I think by the end of the year, I don't know if you were ready yet to say you can go over 370. I guess the question there is, what would need to happen for NIM to be below 370 at the end of the year?
The biggest drivers to our net interest margin right now is really loan growth. It's really getting the CRE book to start to grow. CNI is going to happen. I feel pretty good about that. So that, I think, will come on strong. But getting CRE to turn and to also start to contribute, I think, is really key. The other thing I would really focus on is the yield environment. Right now, yields have stayed up relatively well. We're relatively neutral. If they do come down, we'll go down a touch maybe in NII or margin a bit. We aren't 100% neutral. But we're relatively neutral from that perspective. The shape of the curve, the shape of the curve has actually been positive for us, which is good. But it's been very volatile going up and down.
I think net-net overall, we will continue to guide in the mid to high 360s. We will just see how things play out right now.
With the higher values that go, that's clearly a positive from the fixed asset repricing story. Is there any level at which the volatility or if it moves even higher, does that become a headwind at some stage maybe for loan growth or in any other way for NII?
Yeah, I would tell you that's a great question. If you want us to make the most net income, you want interest rates to fall for us. It may not be the best thing from an NII perspective, but our fee businesses will be stronger. You have more business activity. Mortgage will be strong. Our credit will be much better, improve faster than what it is today and all that. We will have much lower credit costs. Net-net, we probably have a better bottom line. If rates stay where they are or go higher, NII will be stronger and contribute well. Credit will still be good. It will still stay on a downward trajectory, but it's not going to improve as fast. The fee businesses will perform well, but maybe not as much as what they could. I think we're positioned to benefit either way.
It's hard to predict which way rates go. That's why we want to be really diversified.
Just to be clear on that comment, when you're suggesting rates move higher or lower, you are talking about a parallel shift. You would prefer a steeper yield curve?
Yeah, yeah. A steeper yield curve would help, obviously, for NIM. But it could also shift down depending on how much if the Fed decided to drop rates at some point down the road.
Got it. So as of now, you still feel good about the mid to high 360s on NIM?
Yes.
All right, perfect. The other topic I wanted to hit on was fees. I think that's an underappreciated aspect of M&T. You've previously highlighted opportunities in wealth, mortgage, treasury management. What do you see as the largest opportunity?
Yeah, first thing I just want to highlight, we have a really strong net interest margin. That generates a ton of revenue. If you normalized our net interest margin to what the peer average is, our fee income would actually be averaged to the peers. It is because we have a strong margin is why our fees look smaller than the peers. From a fee perspective, we have tons of momentum out in our markets. If you look at trust, our corporate trust, loan agency businesses having a really strong year again this year. We have opened up and invested. We have a couple hundred people now in Europe. We have expanded in Europe. That is starting to grow now, which is positive in that space. On the mortgage front, we brought in some new sub-servicing in the first quarter. We have higher revenues in that space.
We've hired over 100 more originators in our New England markets and all that. Even though we aren't getting a lot of volume from refinancing there, we're getting more volume there than we did just because we have more producers in that space. As far as treasury management goes, treasury management continues to be a strong performer, high single-digit grower for us. Continue to invest in that space as we grow relationships, especially in our business banking space. We're really getting a lot of traction in the treasury management space from that perspective. You have wealth. Wealth is an area we're investing in. For us to grow wealth, we segment wealth into three broad areas: the ultra-high net worth, the high net worth, and then affluent. Affluent had a record year last year.
That's the business that actually gets the customers and supports the customers from a consumer portfolio perspective. That's having another strong year. The middle part that we have in the wealth area, that's the area that's going to grow from our bank, getting more and more referrals from business banking, from the commercial area. Our new leader, Lisa, is really working to drive those referrals in to help drive from that space. The high ultra-net-worth area, we are very competitive in that space. Those are very large accounts and can be chunky at times and all that. Net-net overall, I think we will have good momentum in wealth. That will be a good long-term performer for us.
I guess there's three pillars there: there's wealth and trust, there's treasury management, and there's mortgage. Wealth and trust, treasury, there's momentum. There's core growth coming through there. On the mortgage side, that's a little bit more dependent on rates. Is that fair?
To some extent. The servicing piece is a little bit more immune. I'm surprised and pleasantly surprised how well commercial mortgage is doing, even with our volatile interest rates that we're having. They perform very well there. I think there's just a need for that channel right now to get more permanent financing. We're helping fill that need.
Got it. Maybe pivoting over to expenses. Earlier in the quarter, you spoke about how M&T has seven key strategic projects going on, several of which have required hundreds of millions in aggregate investments. I think you said three of these are close to completion?
Yeah, I think if you look at the ones that are closest to being done, the one in the commercial area where we basically remade how a loan is produced and monitored from a credit perspective and all that, that should be done in the next quarter or so. That is a huge positive piece there. With the finance transformation, we will complete sometime in 2026. GL will come probably the next thing happens maybe in the early part of 2026 from that perspective. We have put in three new data centers. We are putting applications also up into the cloud. That has been going on for a couple of years. That will play out into 2027. I think those are the three largest ones that we have out there that are closest to completion.
We have other ones that we've started knowing that these other ones are starting to wind down. We are putting in the new AFS Vision system in commercial servicing. We're looking at investing in our corporate trust space. I haven't started that yet. That is potentially out there. We've also added and started something in our digital, how we operate and process debits and all originations and the operations. That new system is actually going in and starting to happen there. There is always going to be investments that we're making in our company. What I really look at is we have a disciplined approach of how we allocate the funds, how we monitor how the funds are being used, how the projects are progressing. We have transparency and accountability from all that perspective.
I look at it and balance it to how is the company doing. With all these investments we're making, we're still growing expenses in the 2-3% range. Still probably going to have positive operating leverage this year, pretty sure from that. If I can still produce positive operating leverage and make these investments within that expense base, I think that's showing a lot of good balance that we have there.
Excellent. Let's pivot over to credit. You've seen several consecutive quarters of declines in criticized loans, especially on the commercial real estate side. I think you noted in your deck that there's more room in 2Q as well. With the volatility in the belly of the curve, what impact is that having on CRE paydowns and criticized assets? How do you see that evolving from here?
Yeah, the good news about CRE and from the financial statements that we've gotten is we're getting a lot of upgrades in that portfolio. That's a real positive. We're still getting payoffs in that book too. Net-net, we feel very comfortable that the CRE space criticized book will continue to come down. If you go switch to the CNI space, CNI space is a little bit lumpy, to be honest with you. You got some upgrades. You got some downgrades. You have some impacts depending on what the government's doing and all that from various things that we're seeing. Net-net, I would say CNI will be flat to up a little bit in that space. I think overall we can net it to be overall maybe net down. We'll see how that plays out as the quarter ends.
Are there any risks that you're seeing on the credit side overall?
We're monitoring things very closely and really looking at what the potential impacts are. That's really the most attention that we have there. I don't foresee anything surprising us coming out of the blue that will have any surprises that you see from us from a credit perspective.
Got it. I'm going to come to the audience in just a sec. But maybe we can talk about capital a little bit. M&T is in a pretty strong capital position, 11.5% CET1. I think AOCI is actually a marginal benefit for you. You've talked about getting to 11% this year, 10% at some point after that. How are you thinking about that evolution of capital as we go through this year and next?
For us, first and foremost, the capital we have, we deploy into our communities, into our customers. That is first and foremost. The other thing is we want to make sure we pay a strong dividend, a growing dividend. I think you will see that out of us as well. It comes down to what else can we do with that capital? You can do acquisitions or share repurchases. Right now, from an acquisition, there is nothing imminent. We have been repurchasing shares. We have been very opportunistic with the share repurchases from that perspective. We are going to continue to guide towards 11 and see how that plays out. There are some other things that we will look at, see how the economy performs. We will see how we do on our stress tests, see how our credit quality continues. Those are probably the pieces that we will look at.
Our long-term target is still 10%. I'm sure eventually we will get to that point somewhere down the road. Right now, 11% is the target. That's a fair amount of capital distribution if you just look at that that we have from 11%.
Yeah, I was just going to say with you guys have created about $400 million of capital each quarter after dividends. Last quarter's buyback was about $660 million. 11% is still a long way off. I mean, how aggressive do you think you can be through this year on the buyback front?
Yeah, I do not want to predict exactly what is going on. I do not want to signal to the marketplace. We are going to repurchase well over $2 billion of share repurchases this year. I think that is a fair amount. We have had a little bit softer loan growth out of the start, so we have been repurchasing more. We will see how that plays out. Right now, we are targeting 11% and have been very opportunistic.
We have to seek our results later this month. You've opted into the stress test, the SCB. How are you feeling about the stress capital buffer? Clearly, you've taken actions to bring that down.
Yeah, I think we opted in because we felt that we've made significant strides in de-risking our balance sheet and our company having stronger PPNR earnings generation, as well as having much stronger from an asset quality perspective. This will help validate and show to the marketplace, our investors, our rating agencies, and other constituents out in the marketplace that we continue to move in the forward direction. We actually did an issuance of debt yesterday. You guys were part of the transaction. If you look at what we were able to issue at, you looked at M&T a few years ago, we were wider than all of our peers. We are now within and maybe slightly better than some of our peers. We have made tremendous progress. I think our fixed income investors have seen that.
Got it. As you think about the impact of the stress test results on capital management, as the SCB goes down, that gives you more confidence in that 10% CET1 number. Is that how we should think about it?
Yeah, I think it's confidence. But it's also really just getting everybody, our constituencies, to see the progress we're making and get everybody more comfortable out there. It's the one test out there where people are all put on the same scale and measured equally. To be honest with you, we were one of three that dropped last year. We hopefully will drop this year. Our SCB is still too high. We need to move that down. Hopefully, we make progress doing that this year.
All right. I'll quickly see if there's any questions in the room. All right, maybe we can discuss M&A a little bit. You've spoken about how M&T doesn't have any aspirations of being a national bank. Can you expand on that strategy a little bit? Why not consider opportunities outside your footprint? I mean, M&T has a brand. You have the products, the capital.
Yeah, so if you look at M&T, I view us as a regional champion. We operate in 15 states plus the District of Columbia. We really want to serve our communities and our customers in those communities. That is really important. We do have businesses, obviously, outside those states. In times of stress or whatever, we really focus on supporting and growing that first and foremost before we do anything else from that. I think for us, it is continuing to take our M&T model, the community banking model, and continue to expand that within the markets that we serve. People's got us into New England. We have five new states. We do not have the density in those markets. There are other pockets in our footprint. We do not have density.
I think the more that we can fill in and get density and serve our customers and communities in that space, I think the better off we will have. Being a community bank and how we go to market, there are not many of those left in the industry anymore. I think our motto has really differentiated and has been very successful for us in the past. We believe it is going to continue to be successful in the future.
Is there anything you might want to do on the fees front? Is there anything you might want to build out there?
We always are looking at growing fee businesses and where we can. We've divested some businesses. We'll probably start to maybe look at investing in some other fee businesses if it makes sense for us. I think we're always looking. We look at a lot of stuff. We pass on most of what we look at. We will continue to be curious and be in the marketplace. When something we think feels right that meets all of our checkboxes and all that stuff, we will move forward with something there.
All right, perfect. Maybe to wrap up, last Friday, Michelle Bowman spoke about her priorities and a new role as Vice-Chief of Supervision. Tailoring, I noticed, featured early on on that list. There are several potential changes that investors are watching for. Can you talk a little bit about how you view that, how you view those priorities, and what potential changes would impact M&T the most?
Yeah, I actually watched it online after it. I know we got a lot of reports from that. She is very passionate about doing the right thing for our industry and really focusing on the real risks that you need to be focused on, whether it is credit risk, interest rate risk, liquidity risk, capital. I think we are fully supportive of that. She used an example of third party. Third party should not be weighted like credit risk or interest rate risk from that perspective. I think we are all in agreement with that. Getting and training and the supervision side, I think will continue to be much more balanced from that perspective.
She is focused on the right areas, very passionate about participating and supporting the whole industry from larger banks all the way down to the very small community banks, which is the right mindset because that is what is really important to the United States over the long term. I think we are supportive and look forward to working with her. I know she has a conference coming up in July. I am sure we will get a lot more good information out of that as that plays out. We are really excited about it.
All right, perfect. With that, we're out of time. Daryl, thanks so much for joining us.
Thank you, Manan.