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Comerica Incorporated (CMA) Up 3% Since Last Earnings Report: Can It Continue?

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  • CMA

A month has gone by since the last earnings report for Comerica Incorporated (CMA). Shares have added about 3% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Comerica Q3 Earnings Surpass Estimates, Loans Decline

Comerica has delivered a third-quarter 2021 earnings surprise of 13.10%. Earnings per share of $1.90 easily surpassed the Zacks Consensus Estimate of $1.68. The bottom line compared favorably with $1.48 reported in the prior-year quarter.

The company’s results were supported by benefits from provisions and fee income growth. The net interest income also improved on lower deposit costs. Nevertheless, a reduction in loan volumes was recorded. Higher expenses and weak capital position were major concerns.

The net income was $262 million in the quarter compared with $217 million in the prior-year quarter.

Revenues Rise on Higher Fee Income, Expenses Increase

Comerica’s third-quarter net revenues were $755 million, up 6.3% year over year. The top line beat the consensus estimate of $733 million.

NII improved 4% on a year-over-year basis to $475 million in the quarter on higher loan fees and a reduction in deposit costs. The NIM contracted 10 basis points (bps) to 2.23%.

Total non-interest income was $280 million, up 11% on a year-over-year basis. Higher card fees, commercial lending fees and fiduciary income mainly supported the fee income.

Non-interest expenses totaled $465 million, up 6% year over year. The upswing resulted chiefly from higher salaries and benefits expenses, outside processing fees, and occupancy expenses.

The efficiency ratio was 61.57% compared with the prior-year quarter’s 61.74%. A decline in the ratio indicates a rise in profitability.

Balance Sheet Position Decent

As of Sep 30, 2021, total assets and common shareholders' equity were $94.52 billion and $7.80 billion, respectively, compared with $83.63 billion and $7.87 billion as of Sep 30, 2020.

Total loans declined 3.4% on a sequential basis to $48.13 billion.

Nonetheless, total deposits increased 4.8% from the prior quarter to $79.11 billion.

Credit Quality Strong

Total non-performing assets decreased 11.6% year over year to $296 million. The allowance for credit losses was $639 million, down from $1.04 billion in the prior-year quarter. The allowance for loan losses to total loans ratio was 1.33% as of Sep 30, 2021, down from 1.98% as of Sep 30, 2020.

Net credit-related charge-offs were $2 million compared with $33 million in the prior-year quarter. A benefit to provision for credit losses of $42 million was recorded in the reported quarter against provision expenses of $5 million in the prior-year quarter.

Capital Position Weak

As of Sep 30, 2021, the company's tangible common equity ratio was 7.20%, down from 8.24% in the prior-year quarter. The total capital ratio was 12.51%, declining from 13.12%.

Common Equity Tier 1 (CET1) capital ratio was 10.21%, falling from 10.25% in the prior-year quarter.

Capital Deployment Activities

In the reported quarter, Comerica returned $309 million to shareholders through share repurchases and dividends. The company repurchased $220 million of common stock under its share repurchase program.

Outlook

Comerica provided guidance for fourth-quarter 2021 compared with the third quarter of 2021 on expectations of continued economic growth.

Solid loan growth is expected in the General Middle Market and other businesses (excluding Paycheck Protection Program or PPP), partly offset by a reduction in Mortgage Banker. However, average loans are expected to be unfavorably impacted by the forgiveness of the bulk of PPP loans.

Average deposits are expected to remain strong, benefiting from the latest stimulus.

The company expects NII to reflect benefit from loan growth (excluding PPP), partly offset by lower loan fees. However, NII is expected to be unfavorably impacted by a weak PPP-related income.

Non-interest income is likely to be supported by customer-driven fee categories, benefiting from a rebound in economic conditions. However, these could be more than offset by lower commercial lending, warrant and bank-owned life insurance.

Non-interest expenses are estimated to rise by seasonal expenses and technology investments, offset by a decrease in performance-based incentives. Income tax expenses for 2021 are anticipated to be 22-23% of the pre-tax income excluding discrete items.

CET1 is targeted to be 10%. Credit quality is expected to remain robust.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Comerica Incorporated has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward 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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