DBRS Comments on Comerica Inc.’s 1Q12 Earnings; Senior Debt at “A” Unchanged; Trend Stable

DBRS, Inc. (DBRS) has today commented that its ratings for Comerica Incorporated (Comerica or the Company), including its Issuer and Senior Debt rating of “A”, remain unchanged following the release of the Company’s 1Q12 earnings. The trend on all ratings remains Stable.

In DBRS’s view, the Company’s first quarter results were solid highlighted by positive operating leverage (excluding merger and restructuring charges – M&R), moderate loan growth, continued improvement in credit trends and modest deposit growth in a still challenging economy.

In 1Q12, Comerica reported net income of $130 million, up from $96 million in 4Q11 and from $103 million in 1Q11. On a sequential quarter basis, the improvement was driven primarily from higher fee income, particularly in customer-driven fees, and well controlled expenses, with relatively stable net interest income and provisioning needs. Overall, revenues excluding net securities gains grew 2.2%, while core expenses increased 1.6% resulting in modest positive operating leverage.

DBRS notes that successful cross selling of services in the legacy Sterling footprint and achieved synergies in the quarter also benefited fee income and supported the Company’s previously announced fee income goals.

Positively, Comerica achieved moderate loan growth in the quarter with average loans increasing by 2.0%, or $815 million, sequentially to $42.3 billion, primarily reflecting commercial loan growth of approximately 5.2%, or $1.2 billion. Importantly, the increase within commercial lending was broad-based and led by increases in the National Dealer Services, Energy, Global Corporate Banking, Middle Market Banking, and Technology and Life Sciences sectors. Moreover, Comerica recorded strong increases in commitments, but the line utilization rate remained stable at 47.4%. Indicating that the loan growth is sustainable, the loan pipeline increased across most businesses.

Despite loan growth, lower deposit costs and a stable net interest margin (NIM) of 3.19%, net interest income declined a modest $1 million to $443 million reflecting one less day in the quarter and a lower loan yields. DBRS notes that the remaining excess liquidity held at the Fed is now under $3 billion and this excess liquidity reduced NIM by 21 bps in the quarter. Overall, Comerica reached record deposit levels in the quarter and has one of the lowest cost of funds in the industry. DBRS is mindful that Comerica’s balance sheet remains asset sensitive and management remains focused on holding spreads for new and renewed credit facilities that should allow for strong potential net interest income growth once rates begin to rise. Comerica anticipates net interest income to increase in 2012 benefitting from the impact of the Sterling acquisition and moderate loan growth, while remaining well-positioned for rising interest rates.

Comerica continued to exhibit broad-based improvements in its asset quality, recording the eleventh consecutive quarter of declining net charge-offs (NCOs). Specifically, NCOs contracted by $15 million sequentially to $45 million, or 0.43% of average total loans. DBRS notes that this was the lowest level seen since 3Q07. Moreover, non-performing loans declined $31 million, or 3.5%, to $856 million. Positively, NPA inflows declined nearly 30%, or $30 million, to $69 million, while accruing watch list loans declined over $261 million, or approximately 6%, to $4.2 billion. Overall, nonperforming assets (NPAs) were 2.14% of total loans and OREO.

Benefiting earnings, Comerica had NCOs exceed the loan loss provision for the eighth consecutive quarter. Nonetheless, DBRS views the allowance for loan losses at 1.64% of total loans as sufficient to protect against unexpected losses. Management anticipates credit quality and migration trends to continue to improve as 2012 progresses and for the provisions and NCOs to remain at current levels.

Capitalization remains solid. Indeed, the Company reported an estimated Tier 1 common ratio of 10.33% and its tangible common equity ratio of 10.21% remains very strong. After passing its CCAR stress test, the Company can now repurchase up to $375 million in equity over the next twelve months. Lastly, the Board will likely increase Comerica’s quarterly dividend by 50% to $0.15 per share when it meets next week.

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 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: Michael Driscoll
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.