DBRS Comments on Comerica Inc.’s 3Q12 Earnings; Senior Debt Unchanged at “A”; 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 3Q12 earnings. The trend on all ratings remains Stable.

Comerica reported net income of $117 million, down from $144 million in 2Q12, but up from $98 million in 3Q11. Excluding restructuring charges related to the Sterling Bancshares, Inc. (Sterling) acquisition, net income would have been $133 million in 3Q12 compared to $149 million in 2Q12. Lower net interest income, weaker noninterest income, and modestly higher loan loss provisioning needs more than offset a decline in core expenses.

Positively, the Company continues to deliver both loan and deposit growth even with the planned run-off of some of Sterling’s commercial real estate loans, as well as some higher rate Sterling deposits. Specifically, average loans increased 1% with commercial loans growing a more solid 3%. Moreover, the loan pipeline remains strong. Meanwhile, average deposits increased $1.2 billion during the quarter to a record $49.9 billion with average noninterest bearing deposits increasing an even higher $1.3 billion. Nonetheless, the slow growth, low interest rate environment continues to impede revenue growth resulting in negative operating leverage despite solid expense controls. Comerica’s balance sheet remains asset sensitive and the Company estimates that a 200 basis point (bp) annual increase (on average a 100 bp increase) in rates would result in over $170 million of additional net interest income.

Even though the provision for credit losses increased $3 million to $22 million during the quarter, asset quality indicators continue to improve. Indeed, watch list loans, nonperforming loans (NPLs), and net charge-offs (NCOs) all improved in the quarter. Specifically, NPLs decreased $55 million to $692 million or 1.57% of total loans. Meanwhile, watch list loans of $3.7 billion contracted $182 million and nonperforming assets declined to 1.71% of total loans and foreclosed property from 1.85% in 2Q12. Lastly, NCOs decreased $2 million to $43 million, or 0.39%. With NCOs once again exceeding the provision, the allowance for loan losses declined by $20 million to $647 million, or a still sufficient 1.46% of total loans.

Net interest income declined $8 million to $427 million reflecting margin pressure with asset yields falling more rapidly than funding costs. The margin decreased 14 bps to 2.96% during the quarter reflecting lower nonaccrual interest received, a leasing residual value adjustment, lower asset yields and lower accretion. Looking forward, 4Q12 accretion is expected to decline to around $8 million from $15 million in 3Q12 and the margin should remain under pressure making it difficult for Comerica to stabilize net interest income even with expected growth in average earning assets.

Excluding a $5 million increase in deferred compensation returns (offset in noninterest expenses), noninterest income declined $19 million to $192 million primarily reflecting lower non-customer driven categories. Specifically, Comerica had no securities gains in the third quarter and no incentive bonuses after it received $5 million from its third-party credit card provider in 2Q12. Lower net income from principal investing and warrants, as well as lower derivatives income also negatively impacted noninterest income.

Excluding restructuring expenses from Sterling and the aforementioned $5 million increase in deferred compensation, noninterest expenses were down $6 million reflecting lower litigation and legal fees, as well as lower incentive compensation. The Company expects another $1 million to $4 million in merger and restructuring charges, which will be the last of the Sterling-related charges, in 4Q12.

Including the dividend and share repurchases, Comerica returned $119 million to shareholders, which modestly exceeded net income. Nonetheless, capital metrics remain strong and help support the rating. Indeed, the Company’s tangible common equity ratio remains robust at 10.25%. Moreover, Comerica estimates their Basel III Tier 1 capital ratio to be comfortably above the new 8.5% regulatory standard.

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.

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

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.