A month has gone by since the last earnings report for Comerica Incorporated (CMA). Shares have added about 11.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Comerica Incorporated due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Comerica Q1 Earnings Beat Estimates, Provisions Fall
Comerica reported first-quarter 2021 earnings per share of $2.43, which easily surpassed the Zacks Consensus Estimate of $1.38. Also, the bottom line compared favorably with a loss of 46 cents reported in the prior-year quarter.
The company’s results were supported by significant fall in provisions and fee income growth. Also, the capital position remained strong. Nevertheless, lower revenues, due to reduction in net interest income, were recorded. Moreover, higher expenses and reduced loans balance were major drags.
Net income came in at $350 million in the quarter against net loss of $59 million in the prior-year quarter.
Furthermore, segment wise, on a year-over-year basis, Commercial Bank reported net income against loss in the prior-year quarter. Wealth Management reported 52% growth in net income. Retail Bank also reported growth in net income. The Finance and Other segments reported net loss.
Revenues Fall on Low Rates, Expenses Rise
Comerica’s first-quarter net revenues were $713 million, down 4.9% year over year. Also, the top line missed the consensus estimate of $715.9 million.
Net interest income slipped 14% on a year-over-year basis to $443 million in the quarter, on lower short-term rates. In addition, net interest margin contracted 77 basis points (bps) to 2.29%.
Total non-interest income came in at $270 million, up 14% on a year-over-year basis. Higher card fees, commercial lending fees and derivatives income mainly supported the fee income.
Non-interest expenses totaled $447 million, up 7% year over year. The upswing resulted chiefly from higher salaries and benefits expense, outside processing fees, software expense and occupancy-related costs.
Efficiency ratio was 62.55% compared with the prior-year quarter’s 55.58%. A rise in ratio indicates a fall in profitability.
Solid Balance Sheet
As of Mar 31, 2021, total assets and common shareholders' equity were $86.3 billion and $8.2 billion, respectively, compared with $88.1 billion and $8.1 billion as of Dec 31, 2020.
Total loans declined 3.3% on a sequential basis to $50.6 billion. However, total deposits jumped 1.3% from the prior quarter to $73.8 billion.
Credit Quality: A Mixed Bag
Total non-performing assets increased 30% year over year to $325 million.
Also, allowance for loan losses was $807 million, down 17.5%. Additionally, allowance for loan losses to total loans ratio was 1.59% as of Mar 31, 2021, down from 1.83% on Mar 31, 2020. Further, net loan charge-offs declined 96% to $3 million.
Moreover, a benefit to provision for credit losses of $182 million was recorded during the quarter against provision expense of $411 million in the prior-year quarter.
Strong Capital Position
As of Mar 31, 2021, the company's tangible common equity ratio was 8.3%, down 63 bps year over year. Common equity Tier (CET) 1 capital ratio was 11.09%, up from 9.52%. Total capital ratio was 13.94%, up from 11.85%.
Capital Deployment Activities
During the quarter, Comerica returned a total of $95 million to shareholders through common stock dividends. Notably, the company expects to resume share repurchases from the second quarter of 2021.
Second Quarter 2021
Comerica has provided guidance for second-quarter 2021 compared with the first quarter of 2021 on expectations of gradual improvement in economic conditions.
Comerica expects average loans to reflect growth in several businesses, led by middle market as a result of increasing M&A, as well as working capital and capex needs. This is likely to be offset by declines in Mortgage Banker Finance, National Dealer Services and Energy. In addition, decline in PPP loans due to forgiveness process will have an impact.
Average deposits are expected to remain strong, benefiting from the latest stimulus.
The company projects net interest income to increase as lease residual adjustment will not repeat in the second quarter.
Non-interest income is likely to decline as first-quarter levels of derivatives, warrants and deferred compensation asset returns are not expected to repeat, partly offset by increase in card, fiduciary and syndication fees.
Non-interest expenses are estimated to remain stable, resulting from lower salaries and benefits, offset by increase in outside processing as well as seasonal rise in occupancy and advertising costs.
Provisions for credit losses are expected to be reflective of economic environment, including pace of economic recovery.
CET 1 ratio is expected of around 10%.
Full Year 2021
Solid average loan growth in nearly all business lines (excluding PPP), more than offset by forgiveness of the bulk of PPP loans is expected.
Average deposits are expected to begin to abate as customers put cash to use.
Net interest income to reflect higher loan volume offset by lower securities yields. In addition, PPP volume and accelerated fees are likely to decline.
Allowance for credit losses is anticipated to move towards pre-pandemic level.
Noninterest income is likely to include increases in service charges on deposit accounts, fiduciary income and commercial loan fees, partly offset by lower card fees from decreased stimulus activity.
Continued expense discipline is expected to offset increase in technology investment. In addition, there is likely to be increases due to seasonal factors and revenue-related expenses.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted 5.48% due to these changes.
Currently, Comerica Incorporated has a nice Growth Score of B, a grade with the same score on the momentum front. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Comerica Incorporated has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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