Marshall & Ilsley Credit Cut to Junk

The Milwaukee lender was downgraded by Standard & Poor's on credit and capital concerns.
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Marshall & Ilsley


on Thursday saw its credit rating downgraded by Standard & Poor's to ''BB+/B" from "BBB-/A-3" with a negative outlook.

Shares were down 3% in afternoon trading to $6.04.

In a release announcing the downgrade, S&P said the lender's "loan provisions, charge-offs, and net losses remained very high" during the third quarter, with M&I's loan quality "hurt by a large exposure in the hospitality sector."

Despite "some signs of improved loan performance," S&P expects the bank's loan losses to continue for several quarters, "which will further pressure capitalization levels." The credit rating agency also said that Marshall & Ilsley's recent performance lagged peers.

S&P said that "capital is marginally adequate" and that if operating losses didn't moderate, it would consider lowering the rating again.

The downgrade followed Marshall & Ilsley's earnings release Wednesday, when the company announced its

eighth consecutive quarterly loss

. The third-quarter net loss attributed to common shareholders was $169.2 million, or 32 cents a share, trailing the consensus estimate of a 25-cent loss among analysts polled by Thomson Reuters.

The net loss to common shareholders factored-in dividends of $25.3 million on preferred shares, including $1.715 billion held by the U.S. Treasury Department for bailout assistance through the Troubled Assets Relief Program, or TARP.

M&I's earnings performance improved from a net loss to common shareholders of $173.8 million, or 33 cents a share during the second quarter, and a loss of $248.4 million, or 68 cents a share, a year earlier.

The company's third-quarter provision for loan and lease losses was $431.7 million, while net charge-offs - loan losses less recoveries - totaled $560.3 million, resulting in a $128.6 million "release" of reserves. Out of the total net charge-offs, $201 million "reflected the effect of the resolution of one sizeable loan relationship associated with the hospitality industry."

The reserve release followed the trend for the largest U.S. bank holding companies, including


(C) - Get Report

, which released $1.8 billion from loan loss reserves;

Bank of America

(BAC) - Get Report

, which also released $1.8 billion from reserves;

Wells Fargo

(WFC) - Get Report

, which released $650 million from reserves; and

JPMorgan Chase

(JPM) - Get Report

, which released $1.7 billion from reserves during the third quarter.

The ratio of net charge-offs to average loans for the third quarter was 5.47%, increasing from 4.17% in the second quarter and 4.48% a year earlier. Loan loss reserves covered 3.49% of total loans.

Nonperforming assets - including nonaccrual loans and repossessed real estate - made up %3.90% of total assets as of September 30, declining from 4.17% the previous quarter and 4.44% a year earlier.

Amid weak loan demand and in an effort to boost its capital ratios, Marshall & Ilsley has been shrinking its balance sheet. Total assets were $51.9 billion as of September 30, down 11% year-over-year. While the company didn't include regulatory capital ratios in its earnings release, Marshall & Ilsley reported a tangible common equity ratio of 8.3% as of September 30, the same number as the previous quarter. A year earlier, the tangible common equity ratio was 7.0%.


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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.