Recently, Moody’s Investors Service lowered the ratings of Marshall & Ilsley Corp. (MI) and its subsidiaries. The rating agency also lowered its outlook on the ratings to negative.

The company’s senior debt was downgraded by one notch to “Baa1″ (lower medium grade investment) from “A3″ (upper medium grade investment). The rating agency also downgraded Marshall & Ilsley’s financial strength rating to “C” from “C+” and the long-term deposit rating by one notch to “A3″ from “A2″.

According to the rating agency, there is a possibility that Marshall & Ilsley could face sizable credit losses throughout 2010 resulting from its real estate concentration. However, the credit losses would prevent the company from returning to profitability in the near-term.

Marshall & Ilsley’s third-quarter loss of 68 cents per share was in line with the company’s forecast as well as the Zacks Consensus Estimate. Also, this compares unfavorably with the earnings of 32 cents per share in the prior-year quarter.

The loss was due primarily to a higher loan loss provision for bank holding company loans. At the end of the quarter, the allowance for loan and lease losses increased 23 basis points sequentially to 3.07% of total loans and leases.

Marshall & Ilsley continues to suffer from its exposure to construction and residential development loans in Arizona, Florida’s west coast and certain correspondent channels. Management has taken aggressive steps in identifying credit issues and building capital, which we believe will help the company to take advantage of opportunities going forward in the cycle than most of its peers. However, worse credit quality, lack of core deposit growth and continuous pricing pressures on both sides of the balance sheet will be a drag on upcoming results.

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