DBRS Comments on Comerica Inc.’s 1Q11 Earnings; Senior Debt at “A” Unchanged; Trend Stable

DBRS Inc. (DBRS) has today commented on the 1Q11 earnings of Comerica Inc. (Comerica or the Company). The Company’s ratings, including the Company’s Issuer and Senior Debt ratings of “A” and its R-1 (low) Short-Term Instruments rating, remain unchanged following the release of the Company’s 1Q11 financial earnings. The trend on all ratings remains Stable. DBRS sees Comerica’s 1Q11 net income attributable to common shares of $102 million (compared to $95 million in 4Q10 and a loss of $71 million in 1Q10) as adequate for its rating range.

Comerica continued to exhibit overall improving asset quality metrics in the quarter in an operating environment that has been characterized by loan growth challenges and low interest yields. DBRS views positively Comerica’s steady improvement in credit trends as the Company focuses on strengthening its revenue streams and prepares for the integration of its pending acquisition of Sterling Bancshares. In the quarter, the Company’s financial results reflected sequential improvement benefiting from lower levels of provisions. Nevertheless, core revenue trends signal some challenges for the near-term, particularly if loan balances continue to decline and as regulatory changes add further constraints to earnings generation.

In 1Q11, net interest income was $395 million, declining $10 million, or 2.5%, from 4Q10. The decrease in net interest income resulted primarily from additional days in the quarter and the maturity of interest rate swaps at positive spreads. Moreover, the increase in excess liquidity of $500 million bolstered deposits at the Federal Reserve to $2.3 billion in 1Q11. This contributed to the slight increase (0.5%) in average earning assets to $49.3 billion, while compressing NIM by 4 bps to 3.25% in the quarter. Another element pressuring net interest income is the sluggish loan demand and contraction in average loan balances. Positively, average loans outstanding increased sequentially for Global Corporate Banking, Energy, Middle Market, National Dealer Services and Technology and Life Sciences, but were offset by declines in average loans for Mortgage Banker Finance and Commercial Real Estate (CRE). Management anticipates low single-digit increase in average loans for 2011, excluding the CRE line of business. NIM is expected to range between 3.25% and 3.30% for 2011.

On a sequential quarter basis, non-interest income declined $8 million, or 3.7%, to $207 million. The decrease reflected an $8 million revenue decline from commercial lending fees and a $6 million decrease in bank-owned life insurance fees, partially offset by a $4 million increase in principal investing and warrants revenue and a $3 million increase in service charges on deposit accounts. Comerica anticipates low single digit declines in non-interest income for 2011 primarily due to the impact of regulatory changes.

Non-interest expenses declined $22 million, or 5%, from 4Q10. The improvement was driven primarily by a $17 million decrease in salaries expense and a $5 million one-time charge recognized in 4Q10 related to the redemption of trust preferred securities. In 1Q11, expenses were $7 million higher for employee benefits due to pension costs. Most of the other line items improved, partially offset by a $5 million increase in share-based compensation expense related to annual share based grants for retirement eligible employees in 1Q11.

Positively, DBRS notes that 1Q11 marked the seventh consecutive quarter of decline in net charge-offs (NCOs) for Comerica. NCOs decreased sequentially by $12 million to $101 million or 1.03% of average total loans (compared to 1.13% in 4Q10). Non-performing assets (NPAs) declined $131 million since Q-O-Q to $1.1 billion or 2.81% of total loans and OREO (compared to 3.06% in the prior quarter). Foreclosed properties declined $38 million from 4Q10 to $74 million. Loans past due 90 days or more and still accruing increased $10 million over the quarter to $72 million, but remain at low levels. NPA inflows also improved, declining $14 million sequentially to $166 million. Moreover, as the best early indicator of future credit quality, watch list loans declined $376 million or 6.8% to $5.2 billion from 4Q10.

Continued broad-based improvement in asset quality metrics led to a 14% sequential decrease in the provision for loan losses to $49 million. DBRS notes that despite declines in allowance for loan losses, reserves to non-performing loans improved sequentially from 80% to 82%. Moreover, the allowance for loan losses at 2.17% of total loans provides an adequate reserve cushion against unexpected losses.

Comerica maintains solid capital and liquidity positions that provide the Company with ample loss absorption capacity. With ratings underpinned by its strong market presence and successful expansion into higher-growth markets, core deposits increased $290 million to $40.2 billion in the quarter and remain strong. Capitalization is healthy following the redemption of its $515 million trust preferred securities on October 1, 2010. Both Tier 1 risk-based capital and Tier 1 common ratios were estimated to be 10.37% in 1Q11. Total risk-based and leverage ratios were estimated to be 14.83% and 11.37%, respectively. DBRS comments that the quality of Comerica’s capital remains solid, as evidenced by a tangible common equity ratio of 10.43% at March 31, 2011.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Roger Lister
Initial Rating Date: 24 April 2001
Most Recent Rating Update: 19 January 2011

For additional information on this rating, please refer to the linking document below.