DBRS Comments on the Q4 09 Results of Marshall & Ilsley Corporation – Senior at BBB (high)

DBRS today commented on the Q4 2009 results of Marshall & Ilsley Corporation (M&I or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (high) with a Negative trend. M&I reported a net loss attributable to common shareholders of $259.5 million, down from a net loss of $248.4 million in the previous quarter, but an improvement from a net loss of $1.9 billion in Q4 2008. The sequential quarter decline was driven by higher than expected provisions for loan losses as asset quality remains very challenging despite lower levels of nonperforming assets (NPAs) and early stage delinquencies. Results were bolstered from non-core net securities gains of $40.6 million and debt termination gains of $30.9 million. Positively, margin expansion of 13 basis points (bps) increased net interest income by 3% even with lower average earning assets as the Company continues to deal with weak loan demand and its intentional run down of the construction and development (C&D) portfolio. This problematic portfolio represents 12.5% of the total portfolio compared to 18% a year ago. While the results were weak, the Company has maintained a strong tangible common equity ratio of 8.2% and has been aggressive with dealing with problem credits.

Asset quality remains a significant challenge for M&I. Even though both nonperforming loans (NPLs) and early stage delinquencies declined 9% and 16% during the quarter, respectively, the provision for loan and lease losses increased an incremental $60.3 million in Q4 to $639.0 million. Higher loss rates in the more recent quarters are driving the higher provisioning needs, which should remain elevated in 2010. Nonperforming loans and leases now represent 4.62% of loans and leases, which is an improvement of 26 bps from Q3 2009. DBRS notes that the problematic C&D portfolio comprised 39% of all NPLs. Meanwhile, net charge-offs (NCOs) increased to $572.3 million, or 5.01% of average loans and leases (annualized), from 4.48% in the third quarter. C&D NCOs accounted for 47% of Q4 2009 charge-offs with Arizona, where real estate prices are down over 50% from their peak, causing the most losses. The provision did exceed NCOs by $66.7 million building the reserve to 3.35% of loans and leases. The loan loss reserve build increased coverage of NPLs to 75% from 67% during the quarter. Excluding NPLs subject to specific impairment analysis where loans are written down to net realizable value either through charge-offs or specific reserves, reserve coverage would increase to a strong 191%.

In October 2009, M&I raised $863 million in net proceeds through a common stock offering bolstering the Company’s balance sheet and loan loss absorption abilities. Indeed, even with another large quarterly loss, the Company’s TCE ratio remains strong at 8.2%. Positively, M&I evaluated its deferred tax asset and determined no valuation allowance was needed.

The Negative trend reflects DBRS’s concern over the considerable asset quality issues at the Company. While there have been some signs of stabilization/improvement within the loan portfolio and a capital raise that appears sufficient to absorb losses in the coming quarters, the economic recovery remains fragile and significant downside risks remain. If the scale of quarterly losses do not show improvement over the next several quarters, the ratings are likely to be downgraded. Conversely, if credit quality does improve and the Company demonstrates that it is likely to return to profitability with an adequate capital cushion, the trend could be restored to Stable.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.