DBRS Downgrades Marshall & Ilsley Corporation to “A”; Trend is Stable

DBRS has today downgraded the long-term ratings of Marshall & Ilsley Corporation (M&I or the Company) to “A” from A (high) and its short-term rating to R-1 (low) from R-1 (middle). At the same time, DBRS downgraded the long-term ratings of M&I’s operating bank subsidiaries – to A (high) from AA (low) and confirmed their R-1 (middle) short-term ratings. The trend for all ratings is Stable. These actions are indicated in the table below.

Today’s rating actions conclude a Review with Negative Implications initiated by DBRS in April 2007 following M&I’s announcement of its intent to spin off Metavante Corporation (Metavante), a fully owned subsidiary, into a separate public company. The rating actions anticipate the completion of the spin-off in early Q4 2007 as intended by M&I and Metavante.

Metavante is a leading provider of a broad range of loan payment and processing services. Its earnings have been steadily growing at about 26% CAGR over the past four years. Importantly, its contribution to M&I’s consolidated earnings has also been rising, accounting for 20% of M&I’s net earnings in 2006, up from 17% in 2005. Metavante’s businesses are particularly attractive because they are fee-based, carry minimal credit risk, are less vulnerable to economic trends than the lending business and require minimal balance sheet usage. At the same time, however, Metavante requires regular capital investments to maintain its state-of-the-art technology and broaden its scale relative to competitors. Metavante’s need for a steady capital infusion, in turn, has hindered M&I’s capacity to pursue its strategic initiatives to expand its banking franchise.

In DBRS’s view, the spin-off improves M&I’s prospects to continue building out its banking franchise and product capabilities. In the short to medium term, however, without the contribution of Metavante, the strength and diversity of M&I’s earnings as well as its profitability metrics are likely to be more in line with those of banks rated A (high) by DBRS.

The cash proceeds from the spin-off will simultaneously strengthen M&I’s capital, lower its debt obligations and provide funding for further developing its branch network and product capabilities. The current banking franchise, however, is not evenly developed across regions. Wisconsin, where M&I has dominant deposit and banking market shares, accounts for nearly half of the Company’s income. Elsewhere, the network is fragmented in MSAs located in non-contiguous states where M&I’s prevailing market shares are substantially smaller and more vulnerable to competition. Loan and deposit growth rates generated in these markets have been high in absolute terms and relative to those in Wisconsin, and are expected to remain so given the Company’s intent to further invest in strengthening its network in these attractive locations.

Core deposits in the aggregate account for less than 60% of loans, resulting in M&I’s high dependence on more costly wholesale funding. In fact, M&I’s deposit and aggregate funding costs are higher than those of its similarly rated peers, and above the median for regional banks of similar size and business model. M&I has ample liquidity and a disciplined approach to funding. Nonetheless, disproportionately high reliance on wholesale funding relative to peers dampens the Company’s profitability.

Without Metavante, non-interest income will drop from over one half of net revenues to less than 30%, leaving M&I much more dependent on net interest income. Building out fee-based product capabilities, such as wealth management and trust services, are priorities for the Company, and good progress is being made to that end. For the time being, however, revenues are still not sufficiently diversified relative to higher-rated banks.

M&I’s risk profile is conservative. Asset quality remains good in spite of some weakening over the past two years and an elevated risk concentration in commercial real estate and construction loans. Capitalization will be robust post spin-off, but capital ratios are expected to return to levels appropriate for the peer group as excess capital is being absorbed by new investments and acquisitions. Interest rate risk is maintained within tight tolerances. The Company has a successful track record of selecting and integrating relatively small bank acquisitions in strategic locations.

Marshall & Ilsley Corporation, a diversified financial services corporation headquartered in Milwaukee, Wisconsin, reported $58.3 billion in consolidated assets as of June 30, 2007.

Note:
All figures are in U.S. dollars unless otherwise noted.
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