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.
Three major financial institutions reported earnings today (GE Capital, the finance unit of GE, along with Citigroup and Bank of America) and while all were profitable, one sore spot stuck out when you dug through the mounds of data each company reported: Commercial real estate remains a big drag.
GE Capital had net income of $830 million – and that was after it lost $524 million in its real estate portfolio. The unit said it wrote off $186 million of bad commercial real estate debt and had $1.6 billion of non-performing assets. It placed at $6.3 billion its unrealized real estate loss.
The problems facing the commercial real estate business are hitting the big and small. The Wall Street Journal reported today on the decision by Tishman Speyer to essentially hand over the huge Peter Cooper Village and Stuyvesant town apartment complex in NYC to its creditors. The $5.4 billion paid for the property was the most ever paid in the residential real estate business. But much smaller transactions remain in trouble and continue to affect medium and small sized banks all over the country. PrivateBancorp of Chicago reported today that it wrote off $27 million of commercial real estate and construction loans. It had $436 million of nonperforming loans, of which 72% was in commercial real estate or construction.
Bank of America and General Electric today became the latest companies to report more problems in their commercial real estate portfolios (disclosed in their quarterly earnings reports). As you can see from the chart on the left, the quality of CRE loans sitting on Bank of America’s books is deteriorating fairly rapidily. In fact, that $6.9 billion of non-performing CRE loans is a whopping 9.55% of its total CRE portfolio. That’s just about $1 of every $10 the bank has loaned in this area is currently not making interest payments. GE Capital, on the other hand, had about 2.9% of its commercial real estate portfolio that it classified as “non-earning” (for about $1.3 billion). Bank of America has also been forced to set aside more reserves against its commercial real estate portfolio – its allowance for CRE loan losses is now $3 billion versus $1.3 billion a year ago.
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Tell It To Al – A Newswires Blog
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