DBRS Comments on Comerica Inc.’s 2Q12 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 2Q12 earnings. The trend on all ratings remains Stable.

Comerica reported net income of $144 million, up 11% from $130 million in 1Q12 and 50% from $96 million in 2Q11. In DBRS’s view, the Company’s second quarter results were solid highlighted by loan growth, fee income growth, lower expenses, and continued improvements in asset quality. The sequential quarter improvement was driven by modest growth in fee income, primarily from customer-driven fees, lower credit costs, and lower expenses. DBRS notes that Comerica remains on track to achieve $100 million in annual profit improvement from lowering expenses and increasing revenues in 2012. With these initiatives supporting its quarterly performance, Comerica’s adjusted income before provisions and taxes (adjusted IBPT) improved and reflected resiliency despite the low rate environment and considerable macroeconomic uncertainty. Following strong 1H12 results, the Company raised full year guidance on loan growth, net interest income (guided towards the higher part of the previously disclosed range), and noninterest income.

Positively, Comerica delivered both loan and deposit growth during the quarter. Indeed, average loans increased by $959 million, or 2%, reflecting broad-based, strong average commercial loan growth of 5%, which more than offset declines in most other asset classes. Benefiting loan balances, the utilization rate increased to 48.8% in 2Q12. Looking forward, loan pipelines remain strong, which should allow the Company to continue to grow loans.

Meanwhile, average deposit growth was more modest at 1%, but still reached another record level. Importantly, Comerica maintains one of the lowest cost of deposits in the industry at just 25 basis points.

Even with continued loan growth, the net interest margin (NIM) compressed 9 bps to 3.10% driven by the persistently low rate environment and the continual shift in the loan mix into less risky, but lower yielding, commercial loans. Overall, net interest income declined $8 million to $435 million during the quarter and reflected lower accretion on acquired Sterling loans ($7 million), impacts from the mortgage-backed securities portfolio ($5 million) and lower loan yields ($4 million). For 2H12, NIM is anticipated to remain under pressure as the accretion from the Sterling loan acquisition continues to trend downward (estimated to be in the range of $20 to $25 million for 2H12), coupled with the low rate environment and the shift in the average loan mix.

Noninterest income of $211 million increased 2% during the quarter benefiting from a $5 million increase in customer derivative income, a $5 million annual incentive bonus from a third party credit card provider, and a $3 million increase in principal investing and warrants income. These items more than offset a decline in service charges on deposit accounts. DBRS notes that this is the second consecutive quarter of fee income growth following the implementation of the Durbin amendment in 4Q11.

Expenses improved from the prior quarter, declining $16 million, or 5%, to $433 million and were carefully managed. Most notably, salaries declined by 6% to $189 million and other reductions were evident for most of the expense categories. The lower expenses were partially offset by higher merger and restructuring charges of $8 million, and management anticipates additional charges in the range of $25 million to $30 million for the remainder of 2012.

Comerica’s asset quality metrics continue to improve with both watch list and nonperforming loans (NPLs) trending downward. Specifically, NPLs decreased $109 million to $747 million, or 1.70% of total loans, reaching its lowest level since 2008, while watch list loans of $3.8 billion contracted $371 million. Overall, nonperforming assets decreased 29 bps to 1.85% of total loans and OREO. Meanwhile, net charge-offs remained stable at $45 million, or 0.42% of average total loans, and are near normalized levels. Improving asset quality allowed Comerica to continue to release reserves with the allowance for loan losses declining by $37 million to $667 million, or 1.52% of total loans. DBRS notes that the Company added $11 million to the allowance for credit losses on lending-related commitments during the quarter.

Capitalization remains sound with an estimated Tier 1 common capital ratio of 10.32% and a tangible common equity ratio of 10.27%. In the quarter, the Company repurchased $88 million of common stock under its share repurchase program and increased dividends to $0.15 per share as previously guided. Overall, the Company paid out 81% of net income to shareholders in the quarter. Lastly, the Company disclosed its estimated Basel III Tier 1 Capital to be in the range of 9.3% to 9.4%, which is already above the proposed capital requirement.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Alan G. Reid
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.