ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Wednesday, July 02, 2008


marshall & ilsley

both branches of my family have long been involved with marshall & ilsley, a wisconsin-based regional bank. as such, i've devoted some cursory time to them on this blog. i've been aware that they made an ill-fated decision, alongside many other regionals, to seek expansion in florida and arizona in recent years. and i've discussed their overconcentration in commercial and industrial development loans.

this note out yesterday, however, crystallized in my mind just how bad things really are.

Stifel Nicolaus analyst Anthony Davis on Tuesday cut his profit estimates on Marshall & Ilsley Corp. but kept his hold rating on the stock. "Recent news regarding the Arizona residential real estate market has negative implications for Marshall & Ilsley's credit trends over the remainder of 2008 and 2009," the analyst wrote in an investor note. "According to RealtyTrac, the state ranked third in the country in mortgage foreclosures per household during May," Davis said, adding that other data confirm that the Arizona housing market continues to rank among the weakest in the country. "This presents unique challenges for Marshall & Ilsley since 60% of its residential construction and development loans are in Arizona and over half of these credits are land loans."

the stock fell to a new low of $14.67 today. i was lucky enough to sell the inherited stake of my nuclear family's in the 40s. i further managed to convince my father, a small-town banker whose branch was once an MI outlet and the majority of whose retirement was tied into MI stock, to bail out at 45. i can't tell you what a disaster recent events would have been for him and my mom had he not.

but my campaign was unfortunately hardly a universal success. my in-laws remain large holders of the stock. as is too easy and altogether common, they believe MI is coming back at some point -- that the storm will pass if they simply hold on.

but it won't -- and this research note all but confirms it, in my view. writeoffs on development and land loans in arizona are very probably going to exceed 50%. this process alone would deplete MI's capital. then consider that that isn't really the primary threat facing them -- that position is reserved for their heavy concentration into a midwestern C&I market that is simply falling down.

MI has further hesitated to raise capital in spite of their deteriorating environment -- and that is unfortunate, as the window for effective capital raising by selling trust preferreds has closed. as noted by bloomberg:

Gibson is ``standing on the brakes'' because Mountain 1st, owned by 1st Financial Services Corp. of Hendersonville, North Carolina, can no longer sell trust-preferred stock to raise capital for loans so customers can buy airplanes or build veterinary clinics, Gibson said in a June 20 telephone interview. The bank, with $650 million in assets, is among more than 8,000 across the U.S. caught for the past six months in the shutdown of the $117 billion market for the securities, a hybrid of debt and equity.

So-called community banks and larger lenders have sold trust-preferred securities, known as TruPS, for about a dozen years. Collateralized debt obligations became the biggest buyers, generating enough demand to expand the market 10-fold, according to Merrill Lynch & Co. index data. The CDOs packaged the shares and sliced them into pieces with varying credit ratings.

Community banks such as FirsTier were too small to attract insurance companies or mutual funds and sold the securities to CDOs instead, in issues of $10 million or $20 million at a time, according to Fitch Ratings analyst Nathan Flanders.

The market was upended after mortgage foreclosures reached a record high of 2.47 percent for all loans in the U.S., starting a credit-market meltdown that sent investors fleeing to safer government securities.

As the preferred market seized up, the Standard & Poor's Small Cap Regional Banks Index has fallen 34 percent this year, leaving banks unable to sell common stock without diluting existing shareholders. Cut off from fresh capital, some lenders may file for bankruptcy, according to ICBA's Cole.

there's no foreign government sovereign wealth fund coming to the rescue here. this is why reputable firms like fortis can expect something like 6,000 american bank failures bankruptcies to be a significant consideration among a pool of 6,000 american banks. (for context, there are less than 9,000 fdic-insured institutions, 7,000 of which are commercial banks.) the asset sales that popped onto the radar screen in the fifth third capital raising announcement are likely to shortly make even divestment of assets a very difficult avenue by which a bank might raise capital.

per the wall street journal, the reckoning day of the sub-majors is here. it was long ago clear to me that MI would suffer when the credit bubble broke. but the outright failure of the bank is starting to look more and more reasonable as a postulate as the compressing stock price makes equity issuance more and more problematic.

UPDATE: per bloomberg:

Marshall & Ilsley Corp., Wisconsin's largest bank, said it had an unexpected second-quarter loss of as much as $1.60 a share as borrowers failed to repay their debts.

The lender set aside $900 million to cover bad loans in the quarter, because of the biggest U.S. housing slump since the Great Depression. Marshall & Ilsley won't need to raise capital or cut its dividend, the Milwaukee-based lender said today in a statement.

``We cannot predict whether or not we have reached the bottom of the current housing cycle,'' Chief Executive Officer Mark Furlong said in the statement. The company said it would be profitable in the third quarter.

Three percent of Marshall & Ilsley's total loans, about $1.6 billion, are tied to high-risk residential land in Arizona, Goldman Sachs Group Inc. analyst Brian Foran said in a note to investors last month. Arizona, California, Florida and Nevada accounted for 89 percent of the rise in new-home foreclosures in the first quarter as the number of Americans in danger of losing their houses surged to the highest in three decades.

The lender reported in April that first-quarter net income fell 33 percent to $146.2 million on provisions for bad loans to construction companies and real estate developers. The company was expected to be profitable in the second quarter, according to a survey of analysts by Bloomberg.

their sangiune forecast -- no capital raising or dividend cut, profitable in q3 -- strikes me as panglossian. a $900mm set-aside for loan losses amounts to the last two years' worth of profits, and nearly triples the bank's loan loss allowance from $502mm at the end of q1. the nature of the report itself -- just two weeks beofre their normal earnings announcement, buried after the bell headed into a holiday -- is further cause for concern.

UPDATE: m&i makes calculated risk. context provided via housing wire by anshu jain of deutsche bank -- many of the euro banks have been typically far more forthright in their assessments than their dissembling american cousins.

UPDATE: this posting on reggie middleton's boombustblog describes M&I as one of the handful of very sick.

Labels: , ,

This page is powered by Blogger. Isn't yours?