DBRS: Comerica Incorporated’s 4Q13 Earnings Negatively Impacted by Adverse Jury Verdict

Summary:

• Excluding a $50 million increase in litigation reserves, 4Q13 net income of $145 million was down 1.3% sequentially
• Greater than expected accretion related to the acquired loan portfolio helped mostly offset higher expenses and softer noninterest income
• DBRS rates Comerica Incorporated Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) considers Comerica Incorporated’s (Comerica or the Company) core 4Q13 results sound and better than anticipated given the substantial increase in accretion (increased $15 million sequentially) related to the acquired loan portfolio that resulted in higher net interest income.

The Company revised its quarterly and full year earnings results following an adverse jury verdict issued shortly after original results had already been made public. Specifically, the jury ruling had a negative impact to net income of $28 million net of a corresponding adjustment made to incentive compensation. Excluding this impact, net income declined 1.3% to $145 million, as fee income was weaker following a strong 3Q13 and expenses were higher. Comerica’s strong balance sheet includes a robust deposit funding profile, strong capital, and sound asset quality, all of which support the rating.

Positively, while average loans balances were stable during the quarter in line with earlier management guidance, Comerica’s strong commercial lending franchise was able to grow average loans 3% in 2013. Moreover, period-end loan growth was broad-based and the loan pipelines remain strong, which positions the Company well for continued loan growth in 2014. Overall, loan commitments are at their highest levels in four years and utilization rates are increasing.

Negatively, fee income declined 5% to $204 million in the quarter. Fiduciary income was the only customer-driven business to improve sequentially, while noncustomer-driven income was primarily down as a result of a large warrant gain realized in 3Q13.

Excluding the impact of the jury verdict, noninterest expenses remain well controlled although 4Q13 expenses jumped $12 million to $429 million primarily from an increase in deferred compensation that was offset in noninterest income and a favorable litigation outcome in 3Q13. DBRS notes that for the year, adjusted expenses declined by 4.5%, as the Company continues to do a great job on managing expenses. Moreover, management anticipates a further decrease in expenses for 2014.

The Company’s ample capital provides a solid cushion for unexpected losses and growth opportunities even with a high shareholder payout. Indeed, Comerica’s tangible common equity ratio increased during the quarter to 10.07% even with an 88% (73% ex jury verdict) shareholder payout benefiting from favorable pension plan adjustments.

DBRS rates Comerica Incorporated Issuer & Senior Debt at ‘A’ with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]