S&P’s Downgrade Weighs on Wilmington

On June 17, 2009, S&P's Ratings Services (S&P) lowered ratings and revised its outlook on Wilmington Trust Corporation (WL - Analyst Report) along with 22 rated U.S. banks. S&P lowered its outlook to "negative" from "negative watch" on Wilmington and HAD downgraded its long-term counterparty credit rating to “BBB” from “BBB+” earlier. S&P believes that operating conditions for the industry will become less favorable, compared to the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision.

However, Wilmington’s 1Q09 results exceeded expectations mainly due to lower-than-expected provision expense, which more than offset the decline in net interest income and non-interest income. Credit metrics were mixed during the quarter, with non-performing assets increasing to 2.67% of related assets (up 48 bps sequentially) and year-to-date net charge-offs at 0.22% of average loans (down 35 bps sequentially). During the reported quarter, net charge-offs improved somewhat sequentially but non-performing asset levels continued to increase. Moody’s downgraded the rating of the company in April 2009 based on concerns related to its real estate lending concentration and investments in bank trust preferred securities.

Wilmington Trust Corporation is a mid-cap financial holding company whose primary subsidiary, Wilmington Trust Company, is a Delaware-chartered bank and trust company. As of March 31, 2009, Wilmington had $11.5 billion in total assets, $9.4 billion in loans and leases, and $8.3 billion in deposits. Including its three advisory affiliates, Wilmington had $42.9 billion in assets under management, as of this date.

We remain most concerned about Wilmington’s exposure to construction loans (21% of the average loan portfolio). Within the construction loan portfolio, 71% loans are for residential construction/land development. Though Wilmington lends only to smaller homebuilders in the Delaware Valley (60% of the construction loan portfolio) and not to national homebuilders, we expect further deterioration in the credit quality on account of the ongoing weakness in sales.

Further, as the Housing and Commercial Real Estate pricing continues to worsen and unemployment continues to rise, we expect further losses in other loan categories as well, especially Commercial Mortgage (21% of loan portfolio), Residential Mortgage (6%) and Consumer (17%) loan portfolios.

Ahead of its 2Q09 results, scheduled to release on July 24, 2009, we are maintaining our Sell recommendation on the shares mainly due to our concerns related to its large construction portfolio.