DBRS: Comerica’s 3Q Fundamentals Sound; Higher Levels of Criticized Energy Loans, Lower Provisions

Summary:
• Net income available to common shareholders of $134 million was stable with the prior quarter, reflecting a modest increase in revenues, lower litigation reserve releases, and a decline in sequential provisions for loan loss reserves.
• Levels of criticized energy exposures increased during the quarter, due in part to the Company’s expectation of an extended period of low 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) 3Q15 results as sound despite deterioration within the Company’s Energy portfolio. Indeed, balance sheet fundamentals remain solid reflecting deposit growth, and sound liquidity and capital profiles. Despite the continued economic slowdown in Texas, given the downturn in energy prices, Comerica continues to benefit from its geographically diverse footprint. Indeed, the quarter’s modest average loan growth reflected growth within the Company’s California markets, while average deposit growth was driven from within its California and Michigan markets.

During the quarter, Comerica reported modest revenue growth driven by increased levels of spread income and fee income. The slight increase in spread income was driven by one additional day in the quarter and higher average loan balances, partially offset by a narrowing net interest margin. Average loan growth for 3Q15 was relatively broad-based, led by Technology and Life Sciences, as well as commercial real estate loans primarily multi-family loans. Meanwhile, fee revenue growth came primarily from an increase in card fees driven by higher merchant processing services and interchange income. Finally, excluding litigation reserve releases, linked-quarter expenses remain well managed. Management expects 4Q15 expenses to be moderately higher compared to 3Q15.

Going forward, the Energy portfolio remains the primary credit challenge for Comerica. Indeed, approximately 27% of the energy portfolio was considered criticized at September 30, 2015. Importantly, the negative migration into criticized was anticipated, and management expects related losses to be manageable. Positively, Energy balances are coming down and energy companies are cutting expenses and have yet to lose access to the capital markets. Moreover, DBRS notes that asset quality outside of energy remains strong. Overall, the Company’s key asset quality metrics, including net charge-offs and criticized loan ratios, remain well below historical norms.

Capital remains sound with an estimated common equity Tier 1 capital ratio (including Basel III transition provisions, but excluding AOCI) of 10.58%. Overall, Comerica returned 71% of net income to shareholders through dividends and share repurchases.

As of quarter-end, Comerica’s Liquidity Coverage Ratio meets the fully phased-in January 1, 2017 requirement of 100%.

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

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