DBRS: Comerica’s Core 1Q14 Earnings Declined QoQ Primarily Reflecting Lower Accretion

Summary:
• Excluding the impact of 4Q13’s adverse jury verdict, 1Q14 net income of $139 million was down 4% sequentially.
• Solid broad-based loan growth across Comerica’s footprint and most business lines with similar broad-based improvements seen in the loan pipeline.
• 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 1Q14 results as solid reflecting solid broad-based loan growth, the maintenance of a strong balance sheet, and continued success in bringing down core expenses. Nonetheless, the operating environment remains difficult with adjusted income before provisions and taxes declining by 6% sequentially to $214 million driven primarily by lower accretion related to the acquired loan portfolio following a particularly strong 4Q13, as well as two fewer days in the quarter.

Positively, average loan growth of 2% was broad-based across Comerica’s footprint and most business lines with the exception of Mortgage Banker Finance. Moreover, commitments and line utilizations both increased during the quarter. With strengthening loan pipelines, the Company remains well positioned for future loan growth, which should benefit net interest income.

Comerica lowered its outlook for noninterest income for 2014 to be modestly lower rather than stable to 2013 levels, reflecting lower capital markets activity and lower noncustomer-driven income. For 1Q14, DBRS notes that both customer-driven and noncustomer-driven fees were down quarter-over-quarter and year-over-year contributing to downward revision.

The provision for loan losses remained modest and stable, as credit quality remains strong with net charge-offs, nonperforming assets, and criticized loans all improving during the quarter. Overall, the balance sheet remains strong, which supports the rating.

At 65.8%, the Company’s efficiency ratio remains high and above Comerica’s long-term goal of below 60%. While expenses continue to trend downward, Comerica will need higher interest rates to achieve their target.

The Federal Reserve did not object to the Company’s 2014 capital plan, which includes the potential to repurchase up to $236 million of common stock over the next four quarters, the redemption of $150 million (par value) of sub debt, and the Board is also considering a modest dividend increase as well. Despite returning 77% of net income to shareholders in 1Q14, capital remains sound with an estimated Basel III common equity Tier 1 capital ratio of 10.3%.

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.]