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M&T stock getting clobbered Others' subprime woes rub off on it

M&T Bank Corp. shareholders and executives have been frustrated with the plummeting price of their investment lately, but the drop has less to do with M&T and more to do with competitors.

M&T shares on Wednesday hit a 52-week low of $88.01, down more than 29 percent from a high of $124.74 on Feb. 20. The stock recovered somewhat to close Friday at $92.28, still down nearly 25 percent since the first of the year.

With 106.75 million shares outstanding, that's a drop of $3.25 billion in market value in this year -- nearly half of that in the past month.

But what's perhaps most frustrating to the bank is how little it can do about it. Rather than being indicative of what's actually happening at M&T, the price drop appears to reflect the mortgage and capital markets woes of the industry as a whole, and investors' perception that every large bank faces the same problems.

M&T's stock performance this year mirrors that of the industry, as measured by the Keefe, Bruyette & Woods Banks Index and the Standard & Poor's 500 Bank Index.

Even the day-to-day trend lines in a price chart are nearly identical, indicating investors are valuing the company with other large banks -- many of whom have riskier businesses with little in common with M&T.

M&T spokesman C. Michael Zabel acknowledged the "difficult time," but would not comment further on the plunge or on how investors are treating the bank, citing company policy not to discuss stock price fluctuations.

"Our daily focus is on running the bank, and over time the stock price will take care of itself," he said. "Day-to-day, week-to-week, month-to-month fluctuations in the stock price are largely out of our control."

Buffalo-based M&T is normally a steady performer that has seen the value of its stock grow at an average annualized rate of 23 percent for the past 25 years. That puts M&T in the top 20 of all publicly traded companies in that time, Zabel said.

Even since the technology stock bubble burst in March 2000, he said, M&T shares are up 103 percent, while the KBW Banks Index is up 20.3 percent and the benchmark S&P 500 is flat.

"That reflects the focus that we have on the fundamentals, the operation of the bank," Zabel said. "Despite what goes on or is going on in the stock market, our operating philosophy remains very consistent. It's business as usual on the ground."

Earlier this year, however, the bank stumbled, shocking Wall Street and the industry when it issued its first-ever advance warning that its first-quarter earnings would be hurt by a special one-time $18 million charge related to mortgages.

The bank doesn't make subprime loans to borrowers with bad credit, but was active in "Alternative-A" mortgages -- loans to people with good credit but on nontraditional terms. Normally, it sold them to secondary market investors, but this time the bids were deemed too low because investors were spooked by rising mortgage losses.

So it kept $883 million in Alt-A loans on its books instead of selling them, and recorded the charge to reduce their value and prepare for possibly having to buy back other loans it had already sold. It also tightened credit standards and changed its loan policies as a result.

Even so, the miscue dented the bank's image among shareholders, who were accustomed to clean results. Its second-quarter profits were back on track, providing some reassurance, but third-quarter earnings again disappointed shareholders.

A key culprit in the earnings lapse was the bank's passive investment in Bayview Lending Group. The Miami-based commercial mortgage lender wasn't able to complete a pair of loan sales until after the quarter closed, so M&T incurred $9 million in operating expenses but no revenues.

The bank's core operations continued chugging along, although results were limited by the usual factors of tight competition, narrow profit margins on lending, and slow-growth markets. M&T also recorded twice as much in bad loans and doubled the amount of money it set aside for losses, to $32 million, both of which added to the alarm.

Yet, compared to the nation's biggest banks and brokerages, M&T's problems seem paltry:

*Merrill Lynch & Co., the No. brokerage, reported an $8.4 billion write-down on its mortgage investments and a $2.24 billion quarterly loss. Its CEO resigned.

*Citigroup, the nation's largest bank, wrote down $6.5 billion in mortgage investments, and reported a 57 percent drop in profits. Weeks later, it said it would take $8 billion to $11 billion more in losses in the fourth quarter. Its CEO resigned.

*Bank of America Corp., the No. 2 bank, said third-quarter profits fell 32 percent, including a 93 percent drop in investment banking profits and a $717 million trading loss. It's slashing 3,000 jobs.

*No. 3 bank J.P. Morgan Chase & Co. is cutting up to 10 percent of its investment banking jobs in New York, London and Hong Kong after the unit's profits dropped 70 percent because of $1.64 billion in write-downs. It also set aside $680 million for loan losses. Still, profits and revenues both rose, even beating Wall Street expectations.

*No. 4 bank Wachovia Corp. said profits fell 10 percent, as it set aside $408 million for loan losses and wrote down $1.3 billion for capital markets losses. It's cutting 200 jobs.

*Finally, HSBC Holdings Plc, the British parent of HSBC Bank USA, hasn't reported its third-quarter earnings for its U.S. operations yet, but it was the first major lender to disclose rising problems with mortgage losses back in February. That's when it warned that it would set aside 20 percent more for losses -- $1.76 billion -- than analysts were expecting.

The company replaced its North American and HSBC Bank USA CEOs, tightened lending standards, stopping buying loans through brokers, and closed its wholesale subprime lending unit. Most recently, on Thursday, it said it would stop selling and trading mortgage-backed securities.

M&T, on the other hand, has very little investment banking or capital markets business, doesn't trade or hold the most sophisticated mortgage securities, and has a reputation of being more cautious in lending than its big rivals. Even so, it's still being tarred with the same brush as the bigger banks.

As the saying goes, a rising tide lifts all boats. It can also strand them all when it falls.


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