By Telis Demos

Usually people try to avoid tests. But one bank wants the chance to show off how much it has prepared.

M&T Bank, the Buffalo-based bank that is a major commercial property lender, is actually opting in to take part in the Federal Reserve's 2025 annual stress test. Banks the size of M&T, which had about $208 billion in assets at the end of last year, are nowadays typically only subject to the exam every other year. So having done it last year, M&T could have sat this one out.

Instead, it is putting its hand up. It is hoping that some shifts in its business, including shedding some of its commercial real-estate exposures, mean that it is on track to see a lower capital requirement. And it can do that now, rather than wait another year. Lower capital requirements can free up banks' resources for lending, deals or capital return to shareholders.

The Fed released its latest hypothetical scenarios for the test on Wednesday, and analysts said they looked a bit less stressful than in years past. For instance, the worst-case scenario features a smaller drop in commercial-real estate prices, of 30% versus 40% last year.

M&T Chief Financial Officer Daryl Bible, speaking to analysts in mid-January, cited the bank's reduced commercial real-estate lending and strong core revenue performance in the decision to opt in. Those factors could help the bank "stress-test better than what we had in 2024," he said, hopefully bringing down the degree of extra capital it must hold.

In the 2024 test, M&T saw as much as a 3.3 percentage point decline in its key equity capital ratio in the most severe scenario. This was above the median tested bank's 2.6 point drop. That number, plus what dividends a bank is expected to pay out, help determine the additional capital buffer it needs over the minimum. In M&T's case, this buffer was 3.8% after the 2024 test.

Since then, M&T has been reducing loan balances that have been flagged for risks. M&T's criticized commercial real-estate and commercial-and-industrial loans totaled $9.9 billion at the end of 2024, down from $12.6 billion a year prior.

Yet the fact that this year's test looks less strenuous could be a mixed blessing. After all, it is harder to show off your preparation if the test questions get easier.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

February 07, 2025 12:45 ET (17:45 GMT)

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