Marshall & Ilsley's Warning Helps Drag Other Banks Down >MI Last update: 7/7/2008 11:14:52 AM DOW JONES NEWSWIRES Shares of Marshall & Ilsley Corp. (MI) slumped in early trading following the Milwaukee bank's late-Thursday warning that it expects to record a second-quarter net loss on increased loan-loss provisions amid the still-deteriorating housing market. The announcement prompted investors to flee the stock - which was recently down 6.6% to $13.20, an 11 1/2-year low - as analysts began to raise questions about the bank's growth potential and the sustainability of its dividend. The news also affected other bank stocks as Morgan Keegan said Marshall & Ilsley's announcement could weigh on banks with significant exposure to construction and development loans - including Wachovia Corp. (WB), Suntrust Banks Inc. (STI) and First Horizon National Corp. (FHN). Banks were sharply lower Monday, with shares of Wachovia recently down 5.6% to $14.05 and trading below $14 for the first time since the early 1990s. Suntrust was off 7.7% to $32.22, hitting a 13-year low, while First Horizon slumped 8.2% to $6.49, a 17-year nadir. The news also pressured Freddie Mac (FRE), which was down 8.2% to $13.31 as its stock hit a 13-year low. Thursday, Marshall & Ilsley projected a net loss of $1.50 to $1.60 a share. At the time, the mean estimate of analysts polled by Thomson Reuters was for earnings of 34 cents a share. They now expect an 86-cent loss. The bank said it expects to return to profitability in the third quarter, although charge-offs and loan-loss provisions are likely to be higher than usual for the rest of 2008. Meanwhile, the company expects a second-quarter loan- and lease-loss provision of up to $575 million, or $2.22 a share, and charge-offs of up to $415 million. Credit raters Standard & Poor's and Fitch cut some of their grades on Marshall & Ilsley. The third major rating service, Moody's Investors Service, affirmed its ratings on the company while maintaining a negative outlook on the ratings. Equity analysts also weighed in, with a number of them cutting their investment rating on the stock. Richard X. Bove of Ladenburg Thalmann said while Marshall & Ilsley is taking "some very extensive steps to deal with its current problems," its secular growth is now in question. He noted Friday the fact that the bank has been increasing earnings in past years by expanding its loan portfolio with credits from what are now troubled markets "raises the issue as to where loan growth will come from in the future. Lower loan growth means lower revenue growth." Bove said the charges not only lower earnings and will keep pressure on future earnings, but "the problems the bank faces extend to other parts of its business and will lower its secular growth rate." Meanwhile, Bove expects the carrying of what is now expected to be more than $1 billion in non-performing assets will lower Marshall and Ilsley's net interest margin because the liabilities that fund the non-performers will cost more than the assets will yield. Early Monday, JPMorgan analyst Steven Alexopoulos said it appears Marshall & Ilsley's problems are "running deeper than at peer banks," with its amount of excess cushion compared to peers "quickly evaporating." He added that with earnings not expected to cover the dividend over the next several quarters, the sustainability of the company's dividend "will likely be called into question." Alexopoulos cut his investment rating on Marshall & Ilsley's stock to underweight from neutral. He noted, "Although it is not typically our style to downgrade a stock before an expected sharp open to the downside, we are not comfortable enough with the credit picture at M&I to head into Monday's open with a neutral on the shares." He advised investors to sell their shares "until the credit picture shows at a minimum signs of stability." Morgan Keegan also said concern about the dividend will increase near-term, as it lowered its investment rating on Marshall & Ilsley to market perform from outperform. The firm said the news from the bank "should heighten concern surrounding the potential credit losses at regional banks as collateral values of housing related real estate assets continue to decline, especially in high-stress markets such as Arizona." Stifel Nicolaus analyst Anthony R. Davis said his firm is not forecasting a reduction in the payout or a dilutive capital raise "at this point, but we admit there isn't much room for error." The firm - which maintained its hold rating on the stock while telling investors "looking to play rebound in regional banks" to look elsewhere - expects the bank will be earning its quarterly dividend again by the second quarter of 2009. Marshall and Ilsley's second-quarter results are set to be released July 16.