A month has gone by since the last earnings report for Comerica (CMA). Shares have lost about 8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Comerica due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Comerica Q1 Earnings Beat Estimates on Higher Revenues
Comerica has reported positive earnings surprise of 7.2% in first-quarter 2019 on high interest income. Adjusted earnings per share of $2.08 in the first quarter surpassed the Zacks Consensus Estimate of $1.94. Further, earnings were up from the prior-year quarter adjusted figure of $1.54. Including certain non-recurring items, earnings came in at $2.11.
Higher revenues, rise in interest as well as non-interest income, and improved credit metrics were recorded. Moreover, rise in loans was another tailwind. However, lower deposits and rise in expenses were undermining factors.
Adjusted net income came in at $334 million, up 23.2% year over year. This figure excludes securities repositioning charge of $6 million and other non-recurring items.
Furthermore, segment wise, on a year-over-year basis, net income increased 25.7% at Business Bank, more than doubled at Retail Bank and 3.1% at Wealth Management. The Finance segment reported net loss as against the income recorded in the prior-year quarter.
Revenues Up, Expenses Escalate
Comerica’s first-quarter net revenues were $852 million, up 7.4% year over year. However, the figure lagged the Zacks Consensus Estimate of $853.1 million.
Net interest income increased 11% on a year-over-year basis to $606 million. In addition, net interest margin expanded 38 basis points (bps) to 3.79%.
Total adjusted non-interest income came in at $246 million, slightly up on a year-over-year basis. Higher card fees and other non-interest income were mostly offset by decrease in mainly fiduciary income and service charges on deposit accounts.
Further, adjusted non-interest expenses totaled $433 million, slightly up year over year. The upswing resulted from higher salaries and benefits expense, outside processing fee expense and other non-interest expenses.
Adjusted efficiency ratio was 50.81% compared with 54.32% in the prior-year quarter. A fall in ratio indicates a rise in profitability.
Solid Balance Sheet
As of Mar 31, 2019, total assets and common shareholders' equity were $70.7 billion and $7.4 billion, respectively, compared with $72.3 billion and $8 billion as of Mar 31, 2018.
Total loans were up marginally on a sequential basis to $50.3 billion. However, total deposits decreased 2.7% from the prior quarter to $54.1 billion.
Credit Quality Improved
Total non-performing assets plunged 41.3% year over year to $199 million. Also, allowance for loan losses was $677million, down 8.3% from the prior-year period. Additionally, the allowance for loan losses to total loans ratio was 1.29% as of Mar 31, 2019, down from 1.42% as of Mar 31, 2018.
Furthermore, net loan charge-offs slumped 60.7% on a year-over-year basis to $11 million. In addition, provision for credit losses was a benefit of $13 million compared with provision of $12 million in the prior-year quarter.
Strong Capital Position
As of Mar 31, 2019, the company's tangible common equity ratio was 9.66%, down 60 bps year over year. Common equity Tier 1 capital ratio was 10.48%, down from 11.06% reported in the year-ago quarter. Total risk-based capital ratio was 12.80%, down from 14.12% in the prior-year quarter.
Capital Deployment Update
Comerica’s capital-deployment initiatives highlight the company’s capital strength. During the Jan-Mar quarter, Comerica repurchased 5.1 million shares for a total cost of $425 million under its existing equity repurchase program. This, combined with dividends, resulted in a total payout of $530 million to shareholders.
Impressive Outlook for 2019
Comerica has guided for full-year 2019, taking into consideration the current economic and rate environment.
Comerica expects average loans to be up 2-4%. The outlook reflects growth across most lines of business. However, deposits are likely to decline 1-2% due to lower non-interest bearing deposits.
The company anticipates 3-4% higher net interest income, including the benefit of short-term rate increase and growth in average loans. Notably, higher wholesale funding, as well as lower interest recoveries and change in deposit mix might partially offset the benefit.
Non-interest income is estimated to be 1-2% higher, resulting from growth in fiduciary income and card fees, partly mitigated by reduced derivative income and service charges on deposit accounts.
Non-interest expenses are predicted to be down 3%, indicating the end of restructuring charges from the GEAR Up initiatives, reduction in FDIC insurance expenses by $16 million from the discontinuance of the surcharge, lower compensation and pension expense. These are expected to be partly muted by elevated outside processing expenses, in line with improving revenues, technology costs and typical inflationary pressures.
Provision for credit losses is likely to be 10-15 bps and net charge-offs are anticipated to be low, with persistent solid credit quality.
Income tax expenses are expected to approximate 23% of pre-tax income, excluding further tax impact from employee-stock transactions.
Common equity Tier 1 capital ratio is targeted at 9.5-10% through continued return of excess capital.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Comerica has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Comerica has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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