DBRS Comments on the Q1 09 Earnings of Marshall & Ilsley Corporation – Senior at A (low)

DBRS today commented on the Q1 2009 earnings of Marshall & Ilsley Corporation (M&I or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Negative trend. M&I reported a net loss available to common shareholders of $116.9 million, up from a loss of $403.9 (excluding goodwill impairment) million in the previous quarter, but down from net income of $146.2 million in Q1 2008. The sequential quarter improvement excluding goodwill was driven by lower incremental loan loss provisioning, strong mortgage banking revenues, excellent expense control and a one-time tax benefit of $51 million offset by significant margin compression, higher FDIC premiums and a full quarter’s worth of TARP dividend payments. Excluding the one-time tax benefit, the Company would have reported a net loss attributable to shareholders of $167.9 million for Q1 2009. Positively, despite the quarterly loss, M&I was able to maintain its tangible common equity ratio at a solid 6.4%. Given the current rating and the high levels of problem loans, DBRS notes that it has little tolerance going forward for elevated credit costs reducing the Company’s capital cushion, particularly its tangible common equity.

The Company’s construction and development (C&D) portfolio, which still represents a high 16.8% of total loans, continues to weigh heavily on asset quality and earnings. Furthermore, other asset classes have shown some deterioration as this deep recession continues. As a result, nonperforming loans and leases (NPLs) increased sharply to 5.15% of period-end loans and leases in the first quarter from 3.62% in the previous quarter and 1.60% in Q1 2008. While elevated, M&I has conducted specific impairment analysis (FAS 114) on $1.7 billion of loans and marked them to net realizable value, either through charge-offs or specific reserves. Excluding these loans, NPLs declines to a much more manageable 1.80% of loans and leases. DBRS notes that outside of residential real estate-related loans, the Company’s loan portfolio has performed satisfactorily. Once again, the Franklin relationship added to both NPLs and net charge-offs (NCOs) this quarter. After another $34 million charge-off, M&I’s remaining exposure to Franklin is $69 million. Total NCOs were $328 million, or 2.67% of average loans, down from 5.38% last quarter. In the first quarter, the problematic C&D portfolio represented 52% of all nonaccruals and 54% of all NCOs. With housing values still dropping, especially in Arizona where the Company has considerable exposure, and unemployment increasing, DBRS expects asset quality to continue to deteriorate.

During the quarter, margin compression of 36 basis points caused a 13% decline in net interest income. At 2.82%, the Company expects margin pressure going forward, but not to the extent seen in Q1. Deposit pricing floors have prevented M&I from realizing the full benefits of the Fed’s rate cuts. Moreover, pricing on both loans and deposits remains competitive within M&I’s footprint. DBRS notes that while overall deposits declined during the quarter as the Company reduced brokered CD and eurodollar balances, core deposit balances did increase.

Recent expense initiatives such as headcount reductions reduced expenses by 14% (ex goodwill) from the fourth quarter. However, expenses related to nonperforming assets and loan sales will offset some of the expense savings.

The Company’s ratings are underpinned by M&I’s dominant market position within Wisconsin that produces a solid recurring and diversified revenue stream.

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.