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.
General Electric reported earlier today that its earnings and sales were a little softer than everyone expected them to be although orders for new equipment and services grew in the third-quarter – a sign business is picking up.
But one of the clear challenged that remains for GE is its real estate portfolio in its GE Capital unit. The company reported today that its real estate business lost $405 million. Now, that’s better than the $538 million loss in the year-ago quarter, but it shows that the weight of bad loans continues to drag down GE Capital.
The company also noted that it has $1.4 billion in non-performing loans, so, more losses are likely. It wrote off $222 million of losses from that real estate loan portfolio.
GE Capital Finance Reserve Coverage
Commercial loans and commercial real estate continue to be the bogeyman for GE and its finance unit. The company reported a profit of $3 billion earlier today but its once money-minting finance unit contributed only $336 million to that profit. The drag remains real estate, which the company was a little slow to acknowledge last year was a looming problem.
It lost $593 million in the commercial real estate portion of its business in the most recent quarter versus a $60 million loss in the year-ago quarter. More importantly, it lost $1.5 billion for the year (a third of that in the last quarter) versus a gain of $1.1 billion for the prior year.
One of the favorite drums to bang by this blogger is the problems that remain in the commercial real estate market. We all know those problems are vast and have a long way to go to work themselves out. And that those problems can have a mushrooming effect on the economy and any recovery.
An ad in today’s Wall Street Journal (reproduced above) also shows how deep of a problem there is to solve in the commercial real estate market.
iStar Chairman and CEO Jay Sugarman Asks Shareholders Not To Give Up In The 2008 Annual Report
The commercial real estate market will get worse before it gets better. That’s at least what one of the big players in this market seemed to be saying during his company’s conference call earlier today.
Jay Sugarman, chairman and CEO of iStar Financial, a finance company that focuses on commercial real estate, was asked by an analyst during an earnings conference call for his thoughts on the state of commercial real estate markets. Sugarman noted that the top 10% of the market in terms of asset quality is seeing interest from domestic and offshore buyers. But then here’s what he had to say about the rest of the market:
Once upon a time when financial services companies needed to shore up their capital base, they tapped the public markets. But the near meltdown of the financial system last year that felled some banks and brought others to their knees have made that old-fashioned approach very difficult. Particularly for banks that don’t have initials like “J.P.” in front of their names. And especially for little banks that might want to go public.
Enter Plains Capital, a small financial institution based in Texas that hopes to test market acceptance of the small, regional bank looking to do an initial public offering. Plains is an interesting company. It is the 10th largest bank in Texas (and while Northeasterners might scoff at that, the company does say in its preliminary prospectus that if Texas were its own country, it would be the 11th largest economy in the world). Assets are $4.2 billion and it sees decent growth potential. It has a mortgage origination business and the bank is quick to note that it sells all of the mortgages it creates, which reduces the investment exposure in bad mortgages that crippled many banks and mortgage banks. It was the number six mortgage lender in Texas.
And it is in the advisory business through First Southwest Securities. The crux of that business is public finance and related advice to municipalities. First Southwest ranked number two in the number of municipal bond offerings for the five-year period ended last year, it said in its prospectus.
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