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Will other banks issue profit warning like M&T?

M&T Bank Corp.'s profit warning last week could be not only a sign that its own earnings pace could be slowing sharply, but also a harbinger of what may be coming for the rest of the industry, Wall Street analysts said this week.

The Buffalo-based bank said after the market closed on Friday that first-quarter profits would be as much as 36 cents per share lower than Wall Street was expecting, citing a combination of factors related to the sale of mortgages and a narrower profit margin on lending.

That shocked investors and analysts accustomed to a consistent performance from the conservative bank, even in a tough business climate. M&T has had 13 straight years of double-digit earnings growth.

"We're not surprised that they missed earnings, but we are surprised by the magnitude of the miss," said Joseph Fenech, associate director of research at Sandler O'Neill & Partners LP.

"We were a bit taken aback," agreed Lehman Brothers' Jason Goldberg. "It appears M&T's streak is coming to an end."

In response, skittish investors pummeled M&T shares, sending the price down 8.5 percent Monday to close at a 52-week low of $105.95. Shares peaked at a record high of $124.74 on Feb. 20. They regained 13 cents Tuesday to $106.08.

Analysts on Monday slashed their earnings estimates for the bank, both for this year and for 2008, and lowered their price targets for the stock. One analyst, Jennifer A. Thompson of Oppenheimer & Co., even cut her rating on the stock to "sell."

And they cautioned that M&T won't be the only bank affected by these factors.

"I was a little surprised by the whole thing. It seemed to be a pretty significant earnings miss," Thompson said Tuesday. "This is an indication that the fundamental environment for banks in general is getting worse."

Analysts are watching Sovereign Bancorp of Pennsylvania, Regions Financial Corp. of Alabama, Atlanta-based SunTrust Banks of Atlanta, First Horizon Financial Corp. of Tennessee, Charlotte-based Wachovia Corp., San Francisco's Wells Fargo & Co., Cleveland-based KeyCorp, and Pittsburgh's PNC Financial Services Group.

"Clearly this release casts a light on pressures that many banks are likely to experience this quarter," Keefe, Bruyette & Woods analyst Robert Hughes wrote in a research note.

M&T isn't worried by the reaction. "Our focus is on building shareholder value over the long term, not on day-to-day stock market fluctuations, nor on the near-term earnings estimates of Wall Street analysts," said spokesman C. Michael Zabel. "Ultimately, our investors will appreciate the fact that they can rely on us to tell them what we know, when we know it."

In its press release, the company cited its inability to sell a portfolio of certain nontraditional "Alt-A" mortgages, as the collapse of the subprime mortgage market for borrowers with bad credit had dried up investor demand for mortgages overall.

It also said it would have to take a loss on other loans it had previously sold but was contractually required to buy back from dissatisfied investors. And it tightened its underwriting on such loans, scaling back new originations. It did not cite any concerns with loan losses.

"There's clearly skittishness among companies with mortgage exposure right now. The market is very nervous around mortgage and housing related news in general," Fenech said.

But while many investors and observers focused primarily on the mortgage issues, analysts said they weren't concerned by M&T's announcement. Indeed, they praised M&T's decision.

"M&T made the right economic decision," Goldberg said. "They did what will likely be the better move in the long-run."

And they noted the mortgages contributed just part of the gap.

Instead, the analysts focused on the net interest margin, which measures the difference between what the bank pays on deposits and what it earns on loans. M&T said its margin would come in lower because competition drove deposit rates up and M&T was too slow to lower them after realizing it was paying more than rivals.

Also, fewer commercial loans were paid early, so it earned fewer prepayment fees. And it purchased a minority stake in a commercial real estate lender.

"I was more surprised by the level of deterioration in the net interest margin," Thompson said. "This is one of the first indications of what we might see."

Bank margins have been falling for years but are under particular pressure now because short-term rates used for deposits have risen faster than long-term loan rates. Analysts and investors have been closely monitoring margins at community and regional banks, where traditional lending is still king.

M&T will announce its full earnings on April 16. "M&T could have taken the punishment from being the first, but this is something that you could see from others over the next few weeks," Fenech said.


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