Marshall & Ilsley Corp. is betting that steady growth in its wealth management division will help offset the revenue loss from the November spinoff of Metavante Corp. and buffer it against the housing market’s continued troubles.
The technology unit, now Metavante Technologies Inc., had generated about a fifth of the Milwaukee banking company’s profits, and though M&I executives do not expect revenue from wealth management to fill that gap entirely, they are hoping to increase its earnings contribution from 8% to around 12% over time, through acquisitions and organic growth.
“We’ve been very open that it’s unlikely we’ll make any bank acquisitions inside of ’08, but on the wealth management side, we’d take a very strong look at it,” said Gregory Smith, M&I’s chief financial officer.
He would not elaborate on possible acquisitions.
Though Mr. Smith said he does not view the wealth unit’s growth as “a substitute” for Metavante, he acknowledged his $60 billion-asset company has to bring in more revenue.
“Just in terms of the real numbers, it will be a while before” the unit “replaces the Metavante earnings contribution, but it can become that kind of key source of income,” Mr. Smith said in an interview last week.
In the third quarter of 2007, its last full quarter under M&I, Metavante earned $50 million, or about a fifth of M&I’s profit. Excluding the one-time gain of $526 million from the spinoff, Marshall & Ilsley lost $24.5 million in the fourth quarter because of soaring credit costs.
The company posted fourth-quarter chargeoffs of $192 million and a loan-loss provision of $235 million, a thirteenfold increase from a year earlier in each case. Analysts do not expect it to report markedly improved credit conditions when it announces its first-quarter results next month.
The company’s construction loan portfolio has been hit hard by weak real estate markets in Arizona and Florida, where home prices continue to fall. The two states account for the majority of M&I’s nonperforming loans.
“The areas of challenge at the moment remain residential construction,” because the Florida and Arizona housing markets “haven’t turned around yet,” Mr. Smith said.
M&I’s wealth management business, however, produced solid fourth-quarter results, its revenue rising 20%, to $70 million. Since 2004 the division’s contribution to M&I’s earnings has increased from about 6% to 8%. Assets under management were $25.7 billion at the end of 2007, a 64% increase since 2004. (The unit was launched in early 2004 with a $15 billion commitment of assets under management from M&I.)
Though he declined to give a specific time frame, Kenneth Krei, senior vice president and head of M&I Wealth Management, said that over the next few years his unit aims to make a 12% contribution to Marshall & Ilsley’s bottom line.
“And we’d love for it to hit 15%,” he said in the same interview last week.
Mr. Krei said the wealth management unit’s revenue growth reaches across a range of products, with its money management services proving to be a key driver of business. Its growth has also spanned the company’s core service area in Wisconsin, Indiana, and Missouri — including particularly strong showings in Milwaukee, Kansas City, St. Louis, and Indianapolis, among other metropolitan areas — as well as in Florida and Arizona.
Construction lending is slumping in Florida and Arizona, the company says there are many wealthy, often older clients who are settled in those states and not bogged down by housing woes. These clients, leery of investing in real estate, are looking for new ways to manage their money, and they provide growth opportunities for M&I, Mr. Krei said.
Aside from clients that are inexorably linked to real estate problems — both individuals and businesses — most people remain gainfully employed and many have extra income they want to invest, Mr. Krei said. He said this indicates that the economy as a whole is resilient and that M&I’s nonconstruction businesses should hold up well.
“We expect a revenue growth rate in the low- to mid-teens,” Mr. Krei said.
Mr. Smith said that though Marshall & Ilsley has had credit quality issues in Florida and Arizona, the Midwest is showing more resilience.
A weak dollar has bolstered export income for farmers and agribusiness-related manufacturers in Missouri, Minnesota, and Wisconsin, among other key parts of M&I’s Midwest territory. And in most of the Midwest, Mr. Smith said, housing prices never surged as they did in places such as Florida, and they are not falling significantly now.
“In our part of the Midwest, there is a fair amount of strength,” he said.
Anthony Davis, an analyst at Stifel, Nicolaus & Co. Inc., praised Mr. Krei’s ability to ramp up the wealth management business; “the entire financial world is your competition in that area,” he said.
Mr. Davis attributed M&I’s success to a talented staff that has stayed committed to aggressive growth. “I think in wealth management they have some exceptional expertise and they can get bigger and bigger in their existing markets,” he said in an interview last week.
But it will not be enough to counterbalance M&I’s setbacks on construction lending this quarter and next, he said.
“They’ve reported a very sizable increase in loan delinquencies over the past two quarters, and that’s been troublesome,” Mr. Davis said. “It’s of course conceivable that things could improve, but I think that you’ll see further credit deterioration this year. And without Metavante overshadowing things, I think Marshall & Ilsley’s problem issues are going to be very obvious on the earnings front.”
