DBRS Comments on Comerica Inc.’s 4Q11 Earnings; Senior Debt at “A” Unchanged; Trend Stable

DBRS, Inc. (DBRS) has today commented that its ratings for Comerica Inc. (Comerica or the Company), including its Issuer and Senior Debt rating of “A” and its R-1 (low) Short-Term Instruments rating, remain unchanged following the release of the Company’s 4Q11 financial earnings. The trend on all ratings remains Stable.

In DBRS’s view, the Company’s results continued to reflect earnings resilience, positive credit trends, and loan growth opportunities in a still challenging economy. The 4Q11 results represented the first full quarter following the Sterling Bancshares (Sterling) acquisition that was completed on July 28, 2011. The fourth quarter included $37 million in merger and restructuring (M&R) charges and the Company lowered its M&R charge estimate by $10 million (pre-tax, $8mm after-tax) with $40mm (pre-tax) remaining to expense, mostly in 2H12.

In 4Q11, Comerica reported net income of $96 million compared to $98 million in 3Q11 and $96 million in 4Q10. Total revenue (excluding the gain/loss on securities) was up 2.3% in the quarter from 3Q11 to $626 million attributable largely to an increase in earning assets, primarily commercial loans. DBRS notes that the balance sheet and income statement benefits from the Sterling acquisition are already becoming evident but will be more pronounced when the M&R expense recedes. Comerica achieved solid loan growth in the quarter with average loans up by 3.4%, or $1.4 billion, QoQ to $41.5 billion in 4Q11. The increase was across much of its commercial portfolio led by its specialty business, mortgage banker and energy sectors. Moreover, Comerica recorded strong increases in both line utilization and commitments. DBRS notes that the quarter’s revenue growth was partially offset by a 3.9%, or $18 million, sequential increase in expenses consisting mostly of severance, M&R, and other costs related to Sterling.

DBRS sees the quarter as reflecting good progress in operating performance for the Company despite the continuing headwinds of a low interest rate environment, changes in the regulatory landscape, and a slow economic recovery. In 4Q11, net interest income increased $21 million, or 5.0%, QoQ to $444 million. The improvement was primarily driven by an increase in loans and investment securities, and lower deposit costs that were only partially offset by a decline in security portfolio yields. Average earnings assets grew 4.6%, or $2.4 billion, in the quarter primarily due to the above-mentioned loan growth, $1.6 billion, or 21%, growth in average investment securities available for sale (AFS) that were only partially offset by the 11.5%, or $558 million, decrease in excess liquidity. DBRS is also mindful that Comerica’s balance sheet remains asset sensitive with strong potential net interest income growth in an interest rate rising environment.

Net interest margin (NIM) increased 1 bps in the quarter to 3.19% as the 3 bps drop in loan yields and 10 bps drop in AFS securities were more than offset by a 4 bps drop in interest-bearing deposit costs and a 9.5% increase in noninterest-bearing deposits. Also noteworthy was the remaining $4.3 billion in excess liquidity at the Fed which reduced NIM by 24 bps in the quarter.

Adjusted fee income (excluding securities gains/losses) of $186 million in the fourth quarter was down a modest $3 million over the quarter primarily impacted by the $6 million decline in card fees due to the implementation of the new regulatory limits on debit interchange fees.

In 4Q11, Comerica continued to exhibit broad-based improvement in its asset quality, recording a tenth consecutive quarter of declining net charge-offs (NCOs) that decreased by $17 million sequentially to $60 million, or 0.57%, of average total loans and compared favorably to 0.77% at 3Q11. Non-performing loans (NPLs) declined $71 million, or 7.4%, QoQ to $887 million; however, foreclosed properties ticked up $7 million to $94 million in the quarter. This resulted in improved credit metrics with NPAs at 2.29% of total loans and OREO reflecting a 24 bps sequential improvement and 77 bps improvement over the year. NPA inflows declined 24%, or $31 million, sequentially to $99 million while accruing watchlist loans declined $502 million, or 10.1%, sequentially to $4.5 billion. With continuing positive credit trends, the Company recorded a 50% sequential decline in the provision for loan losses to $19 million, marking the seventh consecutive quarter that net charge-offs exceeded the loan loss provision. Despite declines in the allowance for loan loss, Comerica increased its coverage of non-performing loans to 82% compared to 80% in the prior quarter. DBRS recognizes that the allowance for loan losses, at 1.70% of total loans, declined sequentially, but continues to provide an adequate reserve cushion against unexpected losses. Management anticipates credit quality and migration trends to improve into 2012 but believes that NCOs are approaching their normalized level at the current 57 bps of average loans.

Capitalization is solid and liquidity positions are robust, providing ample loss absorption capacity. Tier 1 equity consists of 99.6% common equity. Strong capital levels are evidenced by Comerica’s Tier 1 common ratio of 10.31% and tangible common equity ratio of 10.27% in the quarter, although the ratios declined by 26 and 16 bps, respectively, primarily due to the growth in assets and a modest drop in tangible common equity. As announced in prior quarters, management continued its share buyback activity and repurchased 1.6 million shares in 4Q11 for a total of 4.1 million shares in 2011. The Company is maintaining a first quarter 2012 target total payout ratio of up to 50 percent of net income, including dividends and share repurchases. The implications of the Basel III framework remain uncertain for Comerica, however, DBRS views the Company’s currently robust and prudent capital levels as more than ample for the anticipated regulatory requirements.

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 DBRS Criteria – 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 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: 11 October 2011

For additional information on this rating, please refer to the linking document under Related Research.