Analysts expect more banking companies to lower their earnings as they conduct more frequent impairment reviews to reflect rapidly shrinking market caps and the dwindling value of their operations.
Marshall & Ilsley Corp. raised its fourth-quarter loss nearly fivefold Monday to include a $1.5 billion goodwill impairment charge triggered by the Milwaukee company's falling stock price.
M&I's shares sank 32% in last three months of last year and have dropped 68% so far this year. On Monday they closed at $4.43.
"In an environment like we have now, with the decline in the economy that is as persistent and deep as it is, one would expect that impairment testing probably needs to be more frequent," said Gary B. Townsend, the chief executive of Hill-Townsend Capital LLC.
Greg Smith, M&I's senior vice president and chief financial officer, said it typically tests for goodwill annually, though market volatility and the declining economic environment are prompting it to run quarterly impairment tests.
M&I's fourth-quarter loss is now $1.9 billion, or $7.25 a share, versus the $404 million, or $1.55 share, reported in January. A year earlier the company earned $494 million.
Smith said a review of the shrinking market cap prompted M&I to assess the fair value of its business lines; it found that the fair value of the commercial banking and community banking businesses had fallen below their book value.
Despite the higher loss, he said that his company's capital levels remain strong.
Analysts said the market capitalizations of U.S. financial companies have fallen drastically over the last 12 months, prompting the companies to examine the value of their operations.
The KBW Bank Index has declined 49% since Jan. 1.
"I think there is certainly a risk that you are going to see more of this if the [banking] group doesn't correct itself," said Peter J. Winter, an analyst with Bank of Montreal's BMO Capital Markets Corp.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets Corp, said banking companies that are still consolidating recent acquisitions are vulnerable to impairments.
(Last year M&I bought the Miami fixed-income money manager Taplin, Canida & Habacht Inc., along with First Indiana Corp., an Indianapolis banking company. )
"I would say that the impairment charge problem that began over the summer of 2008 will certainly continue as long as the equity markets continue to decline," Cassidy said. "What is driving the impairment test is the decline in equity values."
M&I joined a list of companies that have report impairment charges.
Fifth Third Bancorp reported a $965 million goodwill impairment for the fourth quarter, citing its declining share price.
The Cincinnati company's shares have dropped 79% so far this year and closed at $1.77 Monday.
However, a Fifth Third spokeswoman said the company still continues to conduct impairment tests on an annual basis.
South Financial Group reported a $237.6 million impairment, in part because of the volatility of its stock price.
The Greenville, S.C., company's shares have dropped 77% so far this year and closed at $1.01 Monday.
South Financial did not return a phone call seeking comment.
On Friday, Citigroup Inc. raised its fourth-quarter loss after citing a goodwill impairment charge for several consumer business units and its Japanese asset management unit.
Gary Crittenden, Citi's chief financial officer, said in an interview that the New York company is conducting impairment tests more frequently to reflect the current environment.
Citi's shares have declined 82% so far this year. On Monday they closed at $1.20, their lowest level in 24 years.
