DBRS: Comerica’s 2Q Fundamentals Solid; Higher Provisions Driven by Energy Exposures

Summary:
• Net income of $135 million was relatively stable with a decrease in litigation expense mostly offsetting a $33 million increase in the provision for credit losses reflecting deterioration in the Energy portfolio.
• Fundamentals remain solid with continued average loan and deposit growth, as well as revenue growth.
• DBRS rates Comerica Incorporated Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) views Comerica Incorporated’s (Comerica or the Company) 2Q15 results as solid despite higher provisioning needs related to the Company’s Energy portfolio. While economic activity has slowed in Texas given lower energy prices, Comerica is benefiting from its geographically diverse footprint. Specifically, Comerica once again delivered broad-based average loan growth, while also growing deposits. Despite higher criticized and nonaccrual loans related to Energy, asset quality remains strong with key asset quality metrics still well below historical norms.

Positively, Comerica reported modest revenue growth with both net interest income and noninterest income increasing sequentially. Net interest income benefitted from loan growth, modest net interest margin expansion, and one extra day in the quarter. Loan growth was particularly strong in Mortgage Banker Finance, but was relatively broad-based with the exception of Energy and Corporate Banking. Management noted that the pipeline strengthened during the quarter and that loan growth should offset margin pressure resulting in relatively stable net interest income. Meanwhile, fee revenue growth came primarily from higher card fees driven by higher merchant services and interchange income.

Excluding a $31 million decrease in litigation-related expenses that was primarily due to a favorable court ruling, core expenses remain well-managed increasing modestly during the quarter. Management expects 2H15 expenses to be higher compared to 1H15.

While the Energy portfolio remains the primary credit challenge for Comerica, DBRS notes that Comerica is building reserves prudently. Moreover, asset quality outside of Energy remains very strong. During the quarter, criticized loans increased $294 million to 4.7% of loans with Energy increasing $329 million. Despite negative credit migration almost entirely in the Energy portfolio, nonperforming assets to total loans and foreclosed property remain low at 0.74%. Net charge-offs increased as well, but remain very modest at 0.15% of average loans and well below the Company’s 0.40% normalized loss rate. Positively, Energy balances are coming down and energy companies are cutting expenses and have yet to lose access to the capital markets.

Capital remains sound with an estimated common equity Tier 1 capital ratio (including Basel III transition provisions, but excluding most elements of AOCI) of 10.53%. Overall, Comerica returned 71% of net income to shareholders through dividends and share repurchases.

Comerica’s Liquidity Coverage Ratio was in the mid 80% range at quarter-end. Management noted that they believe they will need to add $1 billion to $3 billion of high-quality liquid assets by the end of 2016 to fully meet the 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.