DBRS: Comerica's 2Q14 Earnings Strengthen Reflecting Positive Op. Leverage & Broad-based Loan Growth

Summary:

• Reported higher 2Q14 net income of $151 million reflecting positive operating leverage both quarter-over-quarter (QoQ) and year-over-year (YoY).
• Comerica benefitted from broad-based loan growth and the pipeline remains robust.
• DBRS rates Comerica Incorporated Issuer & Senior Debt at 'A' with a Stable trend.

DBRS, Inc. (DBRS) views Comerica Incorporated's (Comerica or the Company) 2Q14 results as strong. Indeed, broad-based loan growth and lower expenses drove positive operating leverage both QoQ and YoY. Excluding securities gains and litigation-related expense, adjusted revenues increased a solid 3.1%, while noninterest expenses declined 0.5% resulting in income before provisions and taxes growing almost 10% sequentially. Moreover, the balance sheet remains strong with sound asset quality, strong capital, and ample deposits, all of which help support the rating.

Once again, Comerica experienced broad-based loan growth across almost all of its businesses with average loans growing another $1.7 billion, or 4%, sequentially. Both the California and Texas markets evidenced solid growth during the quarter. The Michigan market, however, remained stable despite continued strong auto sales, as auto suppliers have generally not expanded their operations yet. As a result of stronger than expected 1H14 loan growth, the Company raised its FY14 average loan growth guidance to 4-6% from approximately 3%. Comerica noted that its loan pipelines remain robust, but that loan growth slowed each month of the quarter following a particularly strong April.

The loan growth and one extra day in the month more than offset continued asset yield pressure and lower accretion resulting in net interest income increasing 1.5% sequentially to $416 million. Despite the strong loan growth, the Company still expects net interest income to decline in FY14, reflecting considerably lower accretion. The net interest margin was relatively stable, increasing one basis point to 2.78%, as loan growth absorbed some excess liquidity and the Company called $150 million of subordinated debt (this transaction will generate a $32 million non-core gain in 3Q14). Meanwhile, both customer-driven and non-customer driven fee income increased during the quarter.

2Q14's positive operating leverage helped lower the efficiency ratio to 63.4% with the Company's asset-sensitive balance sheet needing higher interest rates to achieve its long-term goal of an efficiency ratio below 60%.

Capital remains strong with Comerica's tangible common equity ratio of 10.39% and an estimated Basel III common equity Tier 1 capital ratio of 10.2% at June 30, 2014. During the quarter, Comerica repurchased $59 million of common stock and raised its dividend 5% to $0.20. Combined, the Company returned 63% of net income to shareholders.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.