DBRS Confirms Marshall & Ilsley Corporation at “A” – Trend Negative

DBRS has today confirmed the ratings of Marshall & Ilsley Corporation (M&I or the Company) and its rated subsidiaries, including M&I’s Issuer & Senior Debt rating of “A.” The trend for all ratings remains Negative, except for the Company’s Short-Term Instruments rating, which remains Stable at R-1 (low). The ratings confirmation follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings are underpinned by M&I’s dominant market position within Wisconsin, which produces a solid recurring and diversified revenue stream, and its growing Wealth Management business. Positively, the Company has received approval for a capital infusion from the U.S. Treasury, which will further augment capital metrics and allow M&I to continue to invest in its businesses. The preferred stock investment will also provide more of a cushion to work through asset quality issues. The ratings also take into account a heavy reliance on wholesale funding and below-peer non-interest revenues.

The Negative trend reflects DBRS’s concern over M&I’s deteriorating asset quality, particularly within its still-sizable $9.8 billion construction and development (C&D) loan portfolio. Loan loss provisions related to this portfolio are the primary reason the Company has reported a year-to-date net loss of $164.4 million. With the housing markets showing little sign of stabilization, yet alone improvement, the potential exists for further problems. DBRS also notes that a rapidly deteriorating economy will inevitably start to affect the Company’s other asset classes, which have performed well through the first nine months of the year.

M&I’s asset quality metrics have deteriorated faster than those of its similarly rated peers and significant incremental loan loss provisioning will likely result in a loss for F2008. Even with non-performing loan sales of $105 million, non-performing loans and leases (NPLs) increased to 2.70% of period-end loans and leases in the third quarter from 2.07% in the previous quarter and 1.01% in Q3 2007. While the Florida credit quality issues appear to have stabilized, Arizona remains problematic as real estate values continue to decline. Net charge-offs (NCOs) did decline to 1.21% of average loans in the third quarter from 3.23% in the prior quarter, but remain elevated. Of the $152.3 million in NCOs, 58% are related to M&I’s C&D portfolio. Another $20 million, or 13%, of NCOs were related to reducing non-performing loans in Kansas City from the Gold Bank acquisition. M&I also charged off another $16.5 million of its Franklin Credit Management Corp. exposure, leaving $139.9 million remaining. The Company expects loan loss provisions ($155 million in Q3 2008) and NCOs to remain near Q3 2008 levels over the next several quarters as management does not expect to see any improvement in the economy or residential real estate until well into 2009. While NPL levels are high, DBRS believes management has been aggressive in recognizing loss content as evidenced by the $345 million in partial charge-offs already taken against NPLs. This equates to a substantial haircut of 20%. Furthermore, income before provision and taxes totaled $264.5 million in Q3 2008, which provides M&I with sufficient earnings generation to earn its way through the asset quality problems.

Excluding the effect of banking acquisitions, average loan and lease growth in the first nine months of 2008 was up 9.7% compared with the same time period in 2007. Meanwhile, average organic bank issued deposits actually declined 0.3% during this time period. As a result, year-to-date average wholesale deposits increased $3.0 billion, or 46.9%. Overall, M&I’s reliance on wholesale funding is elevated and is a rating concern. DBRS notes that deposit balances declined during the third quarter as management maintained pricing discipline in a very competitive market. Management noted that there has been no discernible impact on M&I’s deposits related to recent market disruptions.

A key strategic focus of the Company is to grow the Wealth Management business, which contributed 14% of total revenues in the third quarter. Just recently, M&I announced the acquisition of Taplin, Canida & Habacht, Inc., an institutional fixed-income money manager with more than $7.5 billion in assets under management (AUM). On a pro forma basis, M&I would have approximately $32 billion in AUM. However, DBRS notes that continued market declines will have a negative impact on revenues.

To protect capital in today’s difficult operating environment, the Company has not repurchased any shares since the first quarter of 2008. Despite a large Q2 2008 quarterly loss, M&I has maintained a strong tangible common equity ratio, which remained stable at 7.0% at the end the third quarter. DBRS notes that management will weigh future dividend payments against capital and the overall business environment. Positively, M&I was approved for approximately $1.7 billion in preferred stock under the U.S. Treasury’s Capital Purchase Program (CPP). The Company estimates that its Tier 1 and total capital ratios would increase to 10.9% and 14.8%, respectively.

DBRS notes that significant additional credit charges of the scale to materially affect earnings and invade capital could result in negative rating actions. Conversely, the absence of significant future credit costs could result in the restoration of the trend to Stable.

Marshall & Ilsley Corporation, a diversified financial services corporation based in Milwaukee, Wisconsin, reported $63.5 billion in assets at September 30, 2008.

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