DBRS: Comerica’s Solid 4Q Reflecting Revenue, Loan and Deposit Growth

Summary:
• Excluding one-time items, Comerica reported core 4Q net income of $152 million, up from $149 million in 3Q.
• At present, the Company’s energy portfolio, which totals approximately 7% of the total loan portfolio, remains unaffected by the rapid decline in energy prices.
• DBRS rates Comerica Incorporated Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) views Comerica Incorporated’s (Comerica or the Company) 4Q14 results as solid with continued broad-based loan and deposit growth, still improving asset quality and modest revenue growth. Nonetheless, core expenses came in a bit higher than expected primarily driven by an increase in technology-related actions associated with security and regulatory requirements. The balance sheet remains strong leaving Comerica well-positioned to cope with depressed energy prices over the intermediate term.

Total revenues increased modestly sequentially primarily benefitting from higher customer derivative income and commercial lending fees. Net interest income was relatively stable with higher accretion being offset by a lease residual value adjustment. Comerica expects relatively stable revenues for 2015 assuming no rise in interest rates. Meanwhile, core expenses increased faster than revenues resulting in negative operating leverage for the quarter. Despite the increase in 4Q14 core expenses, expenses for the year were well-controlled declining approximately 3%. The Company guided towards higher costs in 2015 primarily reflecting increases in technology, regulatory and pension expenses.

Asset quality continues to improve and remains very strong. Indeed, criticized loans and nonperforming assets continued to decline, while net charge-offs are very low. Meanwhile, capital also remains supportive of the ratings with a tangible common equity ratio of 9.85%.

At present, the Company’s energy portfolio, which totals approximately 7% of the total loan portfolio, remains unaffected by the rapid decline in energy prices. Comerica did increase its qualitative allowance energy allocation, however, as a precaution. DBRS notes that during 2009 when oil prices dropped below $50 for five months, Comerica’s energy-related net charge-offs totaled 69 basis points outperforming the Company as a whole. While not a concern yet, the longer prices remain at current levels, or worse, the more likely credit problems will surface. The Company noted that their typical energy customer hedges approximately 50% of their production for two years. Given the progress Texas has made diversifying its economy to become less reliant on energy, management believes Texas’ robust rate of growth will slow if energy prices remain depressed. Moreover, Comerica’s other footprints in California and Michigan should benefit from lower energy reflecting the benefits of geographic diversification.

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

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