DBRS Comments on Comerica Inc.’s 2Q13 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 2Q13 results. The trend on all ratings remains Stable. The Company reported net income of $143 million for the quarter, up from $134 million in the first quarter, and stable from $143 million in 2Q12.

The Company was able to grow revenues while keeping expenses stable resulting in positive operating leverage. Other highlights of the quarter included average loan and deposit growth, continued improvements in asset quality, and the maintenance of strong capital metrics. DBRS notes that Comerica’s California market is now the Company’s largest in terms of loans outstanding, surpassing the Michigan market for the first time. While Michigan remains the most profitable and is benefiting from increased auto production and sales, both the Texas and California markets are higher growth markets.

Net interest income declined by $2 million to $414 million during the quarter. Excluding accretion on the acquired Sterling portfolio, net interest income would have increased by $2 million. Overall, the net interest margin remained under pressure compressing five basis points (bps) to 2.83%. Meanwhile, noninterest income increased by $8 million to $208 million, primarily reflecting a $6 million annual incentive received from the Company’s third-party credit card provider. Positively, customer-driven fee income increased $4 million reflecting broad-based growth with the exception of a $2 million decline in service charges on deposit accounts that benefited from seasonality in 1Q13.

Expenses remained stable even with a $4 million write-down of other foreclosed assets and higher outside processing fees primarily reflecting lower staffing levels and lower stock awards and incentives. Comerica remains highly focused on expenses and achieving its long-term goal of an efficiency ratio below 60%, which was a still high 66% in 2Q13.

Average loans grew $276 million, or 1%, as commercial loan growth more than offset continued declines in commercial real estate lending. Positively, average commercial real estate loan balances are nearing stabilization; declining just $67 million, or 0.6%, during the quarter. While Middle Market and National Dealer Services lending drove the growth, the Company noted that Corporate Banking loan balances declined given Comerica’s desire to maintain pricing discipline. Positively, the loan pipeline is at its highest level since 1Q12 and 10% higher than in 1Q13 and Comerica still expects continued loan growth in 2H13.

Asset quality remains strong and continues to improve. Indeed, net charge-offs (NCOs), nonperforming assets (NPAs), and watch list loans all declined in the quarter. Specifically, NPAs (excludes loans acquired with credit impairment) declined $55 million, or almost 10%, to $500 million, or 1.10% of total loans and foreclosed property. Meanwhile, watch list loans declined by $224 million, or 7.2%, to $2.9 billion. Lastly, NCOs of $17 million equated to just 15 bps, the lowest level seen since 1Q07. In DBRS’s view, the allowance for loan losses remains sound at 1.35% of period-end loans.

DBRS notes that the rising rates seen in the latter half of the quarter caused the securities portfolio net unrealized pre-tax gain to almost disappear. For the MBS portion that comprises approximately 97% of the portfolio, the net unrealized pre-tax gain decreased $219 million during the quarter to $10 million. The $9.3 billion MBS portfolio has a duration of 4.1 years, up from 3.4 years in 1Q13.

The Company repurchased 1.9 million shares during the second quarter for $72 million. Including dividends, Comerica returned 72% of net income to shareholders. Capital helps support the ratings with an estimated Tier 1 common capital ratio of 10.41% and a tangible common equity ratio of 10.04%. Assuming Comerica elects to exclude most elements of accumulated other comprehensive income, the Company noted that its Basel III Tier 1 common ratio was 10.1%, which already exceeds the minimum requirement to be well capitalized.

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

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