DBRS: Comerica’s 1Q NI Down on Lower Fee Income and Higher Provision; B/S Remains Strong

Summary:
• Reflecting lower fee income and a higher loan loss provision, Comerica reported core 1Q net income of $134 million, down from $152 million in 4Q.
• Average loan growth was broad-based across all geographies and most businesses, while the pipeline strengthened.
• DBRS rates Comerica Incorporated Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) views Comerica Incorporated’s (Comerica or the Company) 1Q15 results as sound. Indeed, Comerica was once again able to deliver broad-based loan growth across all geographies and most of their business lines, while maintaining a strong balance sheet. Moreover, excluding an accounting change, expenses were relatively stable. Although asset quality remained strong, the Company did build reserves during the quarter and depressed energy prices remain the primary credit concern, albeit a manageable concern in DBRS’s view.

An accounting change that took place in the quarter resulting from contractual changes to a card program affected both noninterest income and noninterest expenses. Previously netted, these items are now reported on a gross basis causing both to increase by $44 million this quarter. Excluding the impact of the accounting change and adjusting for non-core items, total revenues declined by 2% sequentially. Net interest income was down modestly, but Comerica’s net interest margin benefitted from lower balances held at the Fed and no lease residual value adjustment (4Q item) that more than offset lower accretion. Meanwhile, lower customer derivative income and commercial lending fees resulted in lower noninterest income. Lastly, core adjusted expenses were relatively stable sequentially.

Asset quality remains strong even with a modest uptick in both criticized loans and net charge-offs, but both remained at low levels. After thoroughly reviewing direct energy exposures, the Company did another deep dive on approximately 165 relationships totaling about $750 million on companies that would be adversely impacted by prolonged low energy prices. Direct energy exposures did see some deterioration during the quarter, but these companies have been managing their costs down and have maintained access to the capital markets. Through April 15, 2015, Comerica had completed about 45% of their energy re-determination rates and none of their clients were found to have deficiencies (borrowings that exceed the approved borrowing base). DBRS remains comfortable with these exposures and notes that the Company did prudently add to the reserves during the quarter. Concerns would increase if and when the capital markets close to energy companies and/or oil and gas prices remain depressed for an extended period of time.

Capital remains sound with an estimated common equity Tier 1 capital ratio that includes Basel III transition provisions, but excludes most elements of AOCI, was 10.43%. The Company noted that the fully phased-in ratio was not significantly different from the transitional ratio. In March 2015, the Federal Reserve did not object to Comerica’s capital plan, which increases the dividend by 5% (Board meets later this month to consider the increase) and repurchases up to $393 million of common shares through 2Q16. Lastly, Comerica noted that its Liquidity Coverage Ratio (LCR) was approximately 80% at quarter-end and management still does not expect a significant impact to earnings as they transition to the 100% mandated regulatory requirement by January 1, 2017.

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

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