M&T expects loan losses to move up, driven by weakness in office CRE

M&T Bank Corp. is closely monitoring its portfolio of loans backed by office buildings amid gathering clouds for the asset class, and projected a modest deterioration in its loss rate in 2023.

Office is "one of the places where we see the most risk and where we're focusing a lot of our attention from a credit perspective," CFO Darren King said during a Jan. 19 conference call on 2022 fourth-quarter results. "When we talk about charge-offs moving up from the levels we've seen in 2022, it will be some of those portfolios that is the place where we've really got our eye."

M&T's ratio of net charge-offs to average loans was 13 basis points in 2022 and 20 basis points in 2021. Regarding 2023, King said, "We expect credit losses to be higher than the strong results in 2022, but to remain below M&T's legacy long-term average of 33 basis points."

Hotel commercial real estate loans had been a top focus of concern, King said, but stress peaked two or three quarters ago when about 86% of M&T's hotel portfolio was criticized, meaning that loans that were flagged for weaknesses according to internal ratings. That figure is now below 50%.

In addition to office, assisted living and senior housing loans have moved up the worry list, King said, reflecting trouble operators are having securing staff for higher occupancy levels.

In office, about 20% of M&T's portfolio was criticized as of the end of 2022, King said. "The vast majority of our real estate portfolio has lease expirations out 2024 and later. So far, what we've seen is decent renewing," King added. But the bank is stressing the portfolio for adverse vacancy and lease rates.

King said M&T has office exposure of about $5 billion, with about 15% in New York City. The bank had total assets of $200.73 billion at the end of 2022 and $45.36 billion of gross CRE loans.

Overall, "credit remained stable" in the 2022 fourth quarter, King said. The bank's quarterly loss provision fell from $115 million in the 2022 third quarter to $90 million as net charge-offs fell and it added $50 million to its allowance.

The bank has been reducing its relative exposure to CRE, and construction loans in particular, in response to regulatory stress test loss projections that have lifted its capital requirements.

M&T's net interest income jumped 8.9% sequentially to $1.83 billion in the 2022 fourth quarter, and its net interest margin expanded 38 basis points to 4.06%. King said the bank continues to expect that deposit costs will catch up to rising asset yields.

But he said the bank expects its NIM to stay above 4% for all of 2023 and to start to move back down to a longer-term historical range in 2024 or 2025.

M&T's shares were up about 5.5% around 2:12 p.m. ET on Jan. 19, while the KBW Nasdaq Bank Index was down about 0.6%.