DBRS Comments on Comerica Inc.’s 4Q12 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 4Q12 earnings. The trend on all ratings remains Stable.

Comerica reported net income of $130 million, up from $117 million in 3Q12, and from $96 million in 4Q11. Excluding restructuring charges related to the Sterling Bancshares, Inc. (Sterling) acquisition, net income would have been $131 million in 4Q12 compared to $133 million in 3Q12.

Highlights of the quarter include continued loan and deposit growth, growth in customer driven fees, continued improvements in asset quality and solid expense control that contributed to modest positive operating leverage. Nonetheless, the net interest margin remains pressured and the operating environment remains difficult particularly with the low interest rate environment depressing the value of Comerica’s considerable deposit franchise. Of note, after incurring $2 million in Sterling restructuring expenses in the fourth quarter, the Company has now completed the restructuring. Positively, the Sterling acquisition has either met or exceeded all financial hurdles set by management.

Average total loans increased $522 million, or 1%, over the quarter with average commercial loan growth of $762 million more than offsetting declines in commercial real estate lending balances. National Dealer Services, Energy, Middle Market and Mortgage Banker Finance were the primary contributors to the commercial loan growth. Both the Company’s Texas and California markets exhibited loan growth, while the Michigan market has almost stabilized. Positively, the loan pipeline remains solid and almost two-thirds of it is related to new business. Nonetheless, management indicated that loan growth should moderate in 2013 given the economic uncertainty, as well as the Company’s desire to maintain pricing and underwriting discipline in a competitive market place.

Average total deposits grew $1.4 billion during 4Q12 and reached a record $51.3 billion with non-interest bearing deposits accounting for almost all of the growth. DBRS notes that the deposit growth was broad-based across most markets and lines of business.

Net interest income declined $3 million to $424 million, but excluding the $2 million decrease in accretion from the Sterling deal, net interest income was relatively stable even with the net interest margin contracting 9 basis points to 2.87%. While accretion declined to $13 million, this level was higher than anticipated, as the Sterling loan portfolio performed better than expected. For 2013, accretion related to Sterling should decline to $20 million to $30 million ($71 million in 2012), which will make it difficult for Comerica to grow net interest income if rates remain low as expected in DBRS’s opinion.

Stronger customer-driven fees contributed to a $7 million increase in non-interest income to $204 million. Meanwhile, expenses excluding restructuring were well controlled increasing just $1 million to $425 million. In 4Q12, the Company’s efficiency ratio was 68%, which is still well above its long-term goal of having an efficiency ratio below 60%.

Asset quality trends continue to improve and are now within the Company’s historical ranges. Indeed, nonperforming assets (NPAs), watch list loans and net charge-offs (NCOs) all declined during the fourth quarter. Specifically, watch list loans declined $565 million to $3.1 billion, NPAs declined $168 million to $587 million, or 1.27% of total loans and foreclosed property, and NCOs were $37 million, or 0.34% of average loans (annualized). As a result of improving asset quality, Comerica’s provision for credit losses declined to $16 million from $22 million in 3Q12, even with loan growth.

Through share repurchases and dividends, Comerica returned 79% of 2012 net income to shareholders. Most recently, the Company repurchased $93 million of common stock in 4Q12. Combined with the dividend, the payout ratio was a high 93% of 4Q12 net income. Nonetheless, Comerica’s capital metrics remain strong affording the Company considerable flexibility to pursue growth opportunities and/or return more capital to shareholders. Specifically, Comerica’s tangible common equity ratio was a strong 9.71% at December 31, 2012. Moreover, the Company’s estimated Basel III Tier 1 common ratio was already well-above Basel III requirements at 9.1%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]