Comerica Beats Earnings Estimates

Zacks

Comerica Incorporated (CMA) has continued its earning streak by delivering the fifth consecutive earnings beat in first-quarter 2014. Lower provision and prudent expense management drove earnings per share of 73 cents, which surpassed the Zacks Consensus Estimate by a penny. Moreover, it compared favorably with 70 cents earned in the prior-year quarter.

Net income was $139 million in the quarter, up 3.7% from $134 million in the year-ago quarter.

Results benefited from a decline in both operating expenses and provision for credit losses. However, the top line deteriorated due to decrease in net interest income and non-interest income. Nevertheless, the company’s healthy capital position, improving credit quality and strong capital deployment activities were tailwinds for the quarter.
 
Furthermore, segment-wise, on a year-over-year basis, Retail Bank’s net income declined 10% to $9 million while Wealth Management reported a 4.0% increase to $26 million. Further, Business Bank segment‘s net income remained unchanged at $198 million.

Performance in Detail

Comerica’s total revenue of $643 million in the quarter was down 2.4% year over year. However, it beat the Zacks Consensus Estimate of $614 million.

Comerica’s net interest income decreased 1.4% year over year to $410 million in the quarter. The decrease was primarily due to lower interest income, partially offset by lower interest expenses. Moreover, net interest margin declined 11 basis points (bps) year over year to 2.77%. Comerica’s non-interest income came in at $208 million, down 2.3% from the prior-year quarter.

Non-interest expenses totaled $406 million, down 2.4% on a year-over-year basis. The decrease was mainly due to a reduction in salaries and employee benefits expense as well as other expenses.

Credit Quality

Credit quality significantly improved at Comerica in the first quarter. Net loan charge-offs fell 50.0% year over year to $12 million. Nonperforming assets to total loans and foreclosed property was 0.76% in the quarter, down from 1.23% in the year-ago quarter.

Provision for credit losses declined 43.8% year over year to $9 million. The allowance for loan losses to total loans ratio was 1.28% as of Mar 31, 2014, down from 1.37% as of Mar 31, 2013.

For 2014, Comerica expects provisions for credit losses to remain flat based on improvement in credit quality.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of Mar 31, 2014, total assets and common shareholders' equity were $65.7 billion and $7.3 billion respectively, compared with $64.9 billion and $7.0 billion as of Mar 31, 2013.

Net loans were up 3.3% year over year to $45.9 billion. Total deposits rose 3.1% from the prior-year quarter to $53.8 billion.

As of Mar 31, 2014, Comerica's tangible common equity ratio was 10.20%, up 34 bps year over year. Moreover, the estimated Tier 1 common capital ratio moved up 17 bps year over year to 10.54%. The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.3% as of Mar 31, 2014, compared with 10.1% in the prior-year quarter. This ratio excludes most factors of accumulated other comprehensive income (AOCIF).

Capital Deployment Update

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, Comerica repurchased 1.5 million shares under the existing share repurchase program. This, combined with dividends, resulted in total payout of 77% of first-quarter net income to shareholders.

Outlook for 2014

Comerica has given an updated outlook for the year 2014. Given the sluggish growth in economy and low-interest rate environment, the company’s outlook for 2014 is modest.

The company expects average loans to be flat in 2014 as compared with 2013. The anticipation reflects stabilization in Mortgage Banker Finance, which is expected to be near the average level of fourth-quarter 2013 and continued focus on pricing and structure.
 
Further, Comerica expects lower net interest income in 2014 due to persistent pressure from the low rate environment and decrease in purchase accounting accretion. These negatives are expected to be partially offset by loan growth.

Non-interest income is expected to drop due to lower non-customer driven income. However, customer driven fee income is projected to be flat. Comerica expects lower non-interest expense in 2014 on account of 50% reduction in pension expense and lower legal expenses.

Our Viewpoint

Going forward, we expect synergies from Comerica’s strategic acquisitions to support its top-line growth. Moreover, the company’s efficient capital deployment activities in the form of shares repurchase, regular payouts and dividend hikes seem impressive as well.

Comerica maintains a strong capital position. Therefore, meeting higher regulatory requirements will not be difficult for the company. Further, approval of Comerica’s 2014 capital plan following the successful completion of Comprehensive Capital Analysis and Review (CCARF) boosted investors’ confidence.

Nevertheless, the sluggish economic scenario, still low rate of interest and a stringent regulatory environment remain challenges to the company’s top-line growth in the coming quarters. Though the pressure on NIM is likely to ease in the long run with improvement in interest rates, we do not see any signs of respite anytime soon.

Currently, Comerica carries a Zacks Rank #3 (Hold).

Performance of Other Wall Street Majors

The earnings season this quarter started on low note with JPMorgan Chase & Co. (JPM) reporting significant earnings miss. Earnings per share of $1.28 lagged the Zacks Consensus Estimate of $1.41 by a wide margin. This time, it was not legal expense that weighed on results but dreary consumer and corporate activities, soft trading volumes and sluggish mortgage banking were the dampeners instead.

However, Wells Fargo & Company (WFC) and Citigroup Inc. (C) delivered better-than-expected results driven by disciplined cost containment and thereby restored investors’ confidence to some extent. While Wells Fargo’s earnings per share of $1.05 beat the Zacks Consensus Estimate by 8.3%, Citigroup’s earnings per share of $1.30 outpaced the Zacks Consensus Estimate by 10.2%.

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