At first, it’s hard to tell if BMO Financial Group’s $4.1 billion acquisition of Marshall & Ilsley is about a strategic expansion of business in the U.S. or an opportunistic buy of a bank beat up by bad real estate loans.
The answer is it is probably both. Marshall & Ilsley has lost money for nearly two years because its loan portfolio – heavily commercial – soured across the board. But it has a strong deposit footprint in Wisconsin, Minnesota, Florida and Arizona.
So along comes BMO (Bank of Montreal), looking for more growth in the U.S. But it was very concerned about that real estate portfolio – so concerned that it took 50 of its risk managers and had them pore over more than 2,500 loan files to get a real handle on how bad M&I’s loan portfolio looked.
It was bad. M&I last quarter reported it had an allowance for loan losses of $1.38 billion, net charge offs were 5.47% and total non-performing loans stood at 4.02%
In its presentation to investors this morning, BMO offered up a pretty negative assessment of this portfolio following its own extensive review: Out of a $38.8 billion portfolio, it sees future losses of 12.1%, or $4.7 billion. The largest part of the portfolio is construction and industrial loans ($16.8 billion). BMO sees 6.1% of that portfolio in trouble. But some of the smaller loan categories have tremendous write off potential down the road. It sees the $6.7 billion commercial real estate loan portfolio suffer a loss of 19.6%. The $3.8 billion construction and development portfolio is seen losing 19.9%.
BMO said in its call with investors it plans to shed the real estate portfolio. But clearly that will be done at a big loss and M&I will need to find ways to raise capital to shelter those losses. It already said it plans a stock offering before the M&I deal closes. But it might need more than that one offering.