Marshall & Ilsley Stays Neutral - Analyst Blog
12 April 2011 - 2:06AM
Zacks
We continue to maintain our long-term Neutral recommendation on
Marshall & Ilsley Corporation (MI). Although
the turnaround in credit quality in the recent quarters has been
impressive, the lack of core deposit growth and the ongoing
interest rate volatility will likely keep net interest margin (NIM)
under pressure.
Despite the fact that management is meeting most of the
challenges with the help of low cost funding and its strong capital
base, pressure on core revenues and higher credit costs will weigh
on upcoming results. However, the impending merger with
Bank of Montreal (BMO) would provide some relief
to the company.
In December 2010, Marshall & Ilsley announced its
acquisition by Bank of Montreal for a stock-for-stock deal valued
at $4.1 billion. As per the terms of the deal, shareholders of
Marshall & Ilsley will receive 0.1257 shares of Bank of
Montreal common stock in exchange for each Marshall & Ilsley
share.
Furthermore, Bank of Montreal would assume responsibility for
$1.7 billion of TARP money and repay the amount before the closure
of the deal. The merger is expected to close by July 31. Overall,
we believe that the merger would mitigate much of the company’s
woes.
We are encouraged to see a sustained turnaround in credit
quality in the recent quarters, caused mainly by a decline in
nonperforming assets ratio. Also, management’s ongoing aggressive
and proactive approach to identify and deal with credit issues is
expected to improve credit losses outlook over the coming
quarters.
Hence, with the gradual improvement of economy and the recovery
of housing markets, Marshall & Ilsley will likely experience a
faster-than-peers earnings recovery.
Additionally, given the new Basel III requirements, the company
appears to keep options open for a potentially higher capital base.
With management implementing various risk-management strategies to
reduce its exposure to construction and development loans, we
expect Marshall & Ilsley to remain adequately capitalized, even
in a stressed scenario.
However, Marshall & Ilsley has been experiencing high levels
of operating expenses over the last few years due to increase in
costs associated with collection efforts and carrying nonperforming
assets. Though the company is taking several expense reduction
initiatives, the costs related to the high level of nonperforming
assets will likely offset the benefits from these cost curtailment
initiatives.
NIM contraction has been another area of concern for Marshall
& Ilsley. However, NIM inched up to 3.15% in the fourth quarter
of 2010 and management anticipates NIM to improve further in the
near term as a result of the company’s debt restructuring
activities. But we believe that there will be increased margin
pressure in the upcoming quarters, mostly due to a lack of core
deposit growth and the ongoing interest rate volatility in the
market.
Currently, Marshall & Ilsley retains its Zacks #3 Rank,
which translates into a short-term ‘Hold’ rating. The company’s
peer, Northern Trust Corporation (NTRS), also
retains a Zacks #3 Rank (a short-term Hold’ rating).
BANK MONTREAL (BMO): Free Stock Analysis Report
MARSHALL&ILSLEY (MI): Free Stock Analysis Report
NORTHERN TRUST (NTRS): Free Stock Analysis Report
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