DBRS Comments on Comerica Inc.’s 3Q13 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 3Q13 results. The trend on all ratings remains Stable. The Company reported net income of $147 million for the quarter, up from $143 million in the second quarter, and from $117 million in 3Q12.

Highlights of the quarter include modest positive operating leverage reflecting higher fee income and solid expense control. Moreover, the Company was able to grow deposits and maintain its strong balance sheet. Nonetheless, average loans declined by $799 million, or 2%, sequentially reflecting the seasonal decline in auto-dealer floor plan loans, a decline in refinance volumes that negatively impacted the mortgage warehouse business, and general overall economic uncertainty and caution of Comerica’s customers. Positively, total loan commitments increased $560 million across most business lines and the loan pipeline is 10% stronger compared to 3Q12. The Company expects average 4Q13 loan balances to remain relatively stable with auto-dealer floor plan loans rebounding, while mortgage warehouse loan balances are expected to decline further.

Despite the contraction in average earning assets, Comerica’s net interest income of $412 million was relatively stable even with a four basis point decline in the net interest margin to 2.79%. One additional day in the quarter, as well as lower prepayment speeds within the securities portfolio mostly offset the aforementioned contraction in average earning assets, as well as lower loan yields. Management indicated that 4Q13 net interest income should be pressured from lower accretion and the continued low rate environment.

Positively, total noninterest income increased $6 million to $214 million reflecting higher commercial lending fees, higher card fees and improved warrant income, which more than offset a decline in fiduciary income and the change in timing of an accrual incentive (previously recorded once a year and is now being accrued each quarter) related to a third party credit card processor that contributed $6 million of revenue in 2Q13. The Company expects noninterest income to decline in 4Q13, as Comerica does not expect non-customer fee income to be as high.

Expense control remains a focus of management and continues to be well managed. Indeed, noninterest expense increased only $1 million to $417 million from one extra day in the quarter and year-to-date adjustments to incentive compensation based on better-than-peer performance offset by lower litigation-related expenses and no 3Q13 write-downs of other foreclosed assets following a $4 million write-down in 2Q13. The Company expects expenses to decline modestly in 4Q13. Overall, the efficiency ratio remained relatively stable at 66.7% in 3Q13 and remains above Comerica’s longer-term goal of a sub-60% efficiency ratio.

Asset quality remained strong with watch list loans declining by $210 million to $2.7 billion, while nonperforming assets declined by $22 million to $478 million, or 1.08% of total loans + ORE. As a result of the continued improvements in asset quality, as well as lower loan balances, the provision for credit losses decreased $5 million to just $8 million. Moreover, management indicated that it expects provisioning to remain low in 4Q13. DBRS views Comerica as sufficiently reserved with the allowance for loan losses more than covering nonperforming loans. While net charge-offs crept up to $19 million, or a still low 0.18% of average total loans from $17 million, or 0.15% in 2Q13, the allowance coverage ratio for the last twelve months of charge-offs remained high at 623%. Lastly, the results of the Shared National Credit exam did not have a significant impact on asset quality metrics.

The Company’s $9.5 billion securities portfolio is almost entirely comprised of mortgage-backed securities (MBS). At September 30, 2013, the duration of the MBS portfolio was 4.2 years compared to 4.1 years in 2Q13 and the Company expects the duration to extend to 5.0 years under a 200 basis point instantaneous rate increase. Overall, the MBS securities portfolio was in a net unrealized pre-tax loss position of $24 million.

Capital remains a source of strength and helps underpin the rating. Indeed, the Company’s tangible common equity ratio was 9.87%. Meanwhile, Comerica noted that its estimated Tier 1 common capital ratio under fully phased-in Basel III capital rules and excluding most elements of AOCI was a strong 10.4% at quarter end. During the quarter, Comerica repurchased 1.7 million of common stock for $72 million. When combined with dividends, the Company returned 70% of net income to shareholders in 3Q13.

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

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