Treasury to Shed Stake in M&T Bank

The U.S. Treasury is offloading its stake in M&T Bank Corp. ( MTB - Analyst Report ) . In this context, yesterday, Treasury announced a public offering of the preferred stock worth $381.5 million it holds in M&T Bank. The move comes as part of its efforts to unwind its bailout program. Public investors will now be able to hold the stock.

The $381.5 million worth of preferred stock comprises 230,000 shares of M&T fixed rate cumulative perpetual preferred stock, Series A, and 151,500 shares of M&T Fixed Rate Cumulative Perpetual Preferred Stock, Series C. The joint bookrunning managers for the offering are Merrill Lynch, Pierce, Fenner & Smith Incorporated and Sandler O’Neill + Partners, L.P.

Back in 2008, M&T Bank participated in the Treasury’s Troubled Assets Relief Program (TARP) and took $600 million in bailout funds. In return, preferred stocks were issued to the Treasury. In the meantime, the acquisitions of two TARP recipients, Provident Bankshares Corp. (acquired in 2009) and Wilmington Trust Corp. (2011), have burdened the company with more TARP funds to pay back. M&T Bank already paid back a part of its TARP dues ($700 million) in May 2011 and was left with the remaining $381.5 million in the TARP preferred stock.

Compared to a number of its Wall Street counterparts, the company is making a slow exit from the TARP as it has been quite hesitant in raising capital through common stock offering.

Our Take

The stake sale by Treasury is a strategic fit. As of now, it could achieve a profit on the whole from bailing out the banks. Also, a number of banks including Synovus Financial Corp. ( SNV - Analyst Report ) and Popular Inc. ( BPOP - Snapshot Report ) are yet to repay their TARP dues.

On the other hand, an exit from TARP is considered a positive for M&T as it would free the company from significant government interventions, pay restrictions and allow financial flexibility. However, the prolonged period of dividend payment has somewhat muted investors’ enthusiasm.

M&T Bank otherwise boasts a solid business model that poises the company well for future growth. Benefits from the Wilmington Trust acquisition are expected to augment its earnings in the years ahead. While the sluggish economic recovery, regulatory issues and low interest rates remain the headwinds for M&T Bank, we believe that a sound capital position, along with a growing core deposit, will uphold it in the long run.

The shares of M&T Bank Corp. retain a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we have a Neutral recommendation on the stock.