Marshall & Ilsley's Loss Narrows - Analyst Blog

Marshall & Ilsley Corporation's (MI) fourth quarter 2010 loss of 25 cents per share was just a penny higher than the Zacks Consensus Estimate of a loss of 24 cents. However, the loss significantly narrowed from 54 cents reported in the year-ago quarter.

Results for the reported quarter benefited from a lower provision for loan and lease losses, increased non-interest revenues and lower non-interest expenses. However, a decrease in net interest income as well as lower average loans and leases were the downside.

For full year 2010, its loss was $1.18 per share, down from $2.46 in 2009. However, this was higher than the Zacks Consensus Estimate of $1.16.

M&I's fourth quarter net loss came in at $133.4 million, compared with $259.5 million in the prior-year quarter. For the full year, net loss was $616.9 million compared with $858.8 million in 2009.

Quarter in Detail

M&I's total revenue for the reported quarter was $631.8 million, down 2.2% from $645.9 million in the year-ago quarter. Total revenue was substantially ahead of the Zacks Consensus Estimate of $561.0 million.

For the full year, total revenue decreased to $2.4 billion from $2.5 billion in 2009. However, revenue for the full year surpassed the Zacks Consensus Estimate of $2.3 billion.

Tax equivalent net interest income for the reported quarter decreased 7.4% year over year to $375.9 million. Net interest margin (NIM) increased 1 basis point sequentially and 20 basis points (bps) year over year to 3.15%. Improvement in NIM was aided by changes in deposit mix but was offset by a higher-than-expected cash balance.

Non-interest revenues for the reported quarter were $255.9 million, up 6.7% from $239.8 million in the prior-year quarter. The increase was primarily a result of higher Mortgage Banking revenues (up 133.5% year over year to $15.7 million), which were offset by decrease in Service Charges on Deposits(down 9.6% year over year to $30.4 million).

Non-interest expenses decreased 1.3% year over year to $400.4 million. Credit-related expenses were $45.3 million, down from $65.1 million in the prior-year quarter.

Efficiency ratio for the reported quarter deteriorated and stood at 69.4%. In the prior-year quarter, efficiency ratio was 67.0%.

Assets Under Management and Assets Under Administration were $33.6 billion and $134.2 billion, respectively, at year end, compared with $32.9 billion and $122.3 billion, respectively, at December 31, 2009.

Credit Quality

Credit quality significantly improved during the quarter. While net charge-offs decreased 61 bps year over year to 4.40% of average loans and leases, nonperforming assets declined 43 bps year over year to 5.11% of period-end loans & leases and other real estate owned.

At the end of the quarter, the allowance for loan and lease losses increased 40 bps year over year to 3.75% of total loans and leases. Provision for loan and lease losses was $429.1 million, down 32.8% from $639.0 million in the year-ago quarter.

Capital Ratios

As of December 31, 2010, M&I's tangible common equity ratio was 7.9%, compared with 8.2% at December 31, 2009. Book value per share declined significantly to $8.89 from $10.21 at December 31, 2009.

Our Viewpoint

Though the turnaround in credit quality in the recent quarters has been impressive, a lack of core deposit growth and the ongoing interest rate volatility are expected to keep net interest margin under pressure.

Management has been able to meet most of the challenges with the help oflow cost funding,disciplineddeposit pricing and the preservation of its strong capital base, but pressure on core revenues and highercredit costswill weigh onupcoming results.

In M&I's peer group, Northern Trust Corporation's (NTRS) fourth quarter earnings missed the Zacks Consensus Estimate. The lower-than-expected earnings were attributable to low interest rate environment, which in turn, was negatively affected by net interest income and trust fees.

M&I currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell' rating. However, in the absence of any significant positive or negative catalyst, we maintain a long-term “Neutral” recommendation on the shares.

 
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