After delivering six consecutive quarters of earnings beat, Comerica Incorporated (CMA) has missed the Zacks Consensus Estimate in third-quarter 2014. Adjusted earnings per share of 79 cents lagged the Zacks Consensus Estimate by 2 cents, though it compared favorably with the prior-year figure of 78 cents.
Decline in non-interest expenses and provision for credit losses were the positives. However, the top line deteriorated due to a decrease in non interest income. Nevertheless, the company’s healthy capital position, improving credit quality and strong capital deployment activities were tailwinds for the quarter.
Including an after-tax net benefit of $5 million or 3 cents per share from certain one-time items, net income was $154 million or 82 cents in the quarter.
Furthermore, segment-wise, on a year-over-year basis, net income of Retail Bank increased 16.7% to $7 million and Business Bank rose slightly to $210 million. However, Wealth Management segment’s net income fell 13.3% to $13 million.
Quarter in Detail
Comerica’s net revenue on a fully taxable equivalent basis was $630 million in the quarter, down 1.7% year over year. Moreover, it lagged the Zacks Consensus Estimate of $637 million.
Net interest income increased slightly on a year-over-year basis to $415 million in the quarter. The increase was primarily due to lower interest expenses. However, net interest margin fell 12 basis points (bps) year over year to 2.67%.
Comerica’s non-interest income came in at $215 million, down 5.7% from the prior-year quarter.
Non-interest expenses totaled $397 million, down 4.8% on a year-over-year basis. The decrease was mainly due to a reduction in salaries and employee benefits expense.
As of Sep 30, 2014, total assets and common shareholders' equity were $68.9 billion and $7.4 billion, respectively, compared with $64.7 billion and $7.0 billion as of Sep 30, 2013.
Total loans were up 9.7% year over year to $47.7 billion, while total deposits rose 8.9% from the prior-year quarter to $57.6 billion.
Credit Quality
Credit quality significantly improved at Comerica in the quarter. Total nonperforming assets declined 25.3% year over year to $357 million. Net loan charge-offs fell 84.2% year over year to $3 million.
Further, provision for credit losses declined 37.5% year over year to $5 million. Allowance for loan losses stood at $592 million, down 2% from the prior-year period. Also, the allowance for loan losses to total loans ratio was 1.24% as of Sep 30, 2014, down from 1.37% as of Sep 30, 2013.
For 2014, Comerica expects provisions for credit losses to remain low based on improvement in credit quality.
Capital Position
During the reported quarter, Comerica’s capital levels remained strong.
As of Sep 30, 2014, Comerica's tangible common equity ratio was 9.94%, up 7 bps year over year. The estimated Tier 1 common capital ratio moved down 3 bps year over year to 10.69%.
The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.4% as of Sep 30, 2014, in line with the prior-year quarter. This ratio excludes most factors of accumulated other comprehensive income (AOCI).
Capital Deployment Update
Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, Comerica repurchased 1.2 million shares for $59 million under its share repurchase program. This, combined with dividends, resulted in a total payout of 62% of third-quarter net income to shareholders.
Outlook for fourth quarter and 2014
Comerica has given an updated outlook for the fourth quarter and 2014. Given the sluggish growth in the economy and low-interest rate environment, the company’s outlook is modest.
Fourth quarter compared with third quarter:
The company expects slight growth in loans considering the seasonal decline in Mortgage Banker Finance, alongside a rise in National Dealer Services. Moreover, growth in other business portfolios is expected.
Further, Comerica expects modest growth in net interest reflecting purchase accounting accretion of $5 million.
Non-interest income is expected to remain flat with stable customer-driven income and lower non-customer-driven income. Comerica expects higher non-interest expense on account of elevated technology and consulting expenses, seasonal rise in benefits expense and certain one-time items in fourth quarter to lead to additional charges of about $5–$7 million.
2014 Compared with 2013:
The company expects average loans to grow around 5% in 2014. Further, Comerica expects lower net interest income in 2014 due to persistent pressure from the low rate environment and purchase accounting accretion of around $30 million. These negatives are expected to be partially offset by loan growth.
Non-interest income is expected to exhibit a moderate decline due to lower non-customer driven income. However, customer driven fee income is projected to remain flat. Comerica expects lower non-interest expense in 2014 on account of a 50% reduction in pension expense and lower legal expenses.
Our Viewpoint
Going forward, we expect synergies from Comerica’s strategic acquisitions to support its top-line growth. Moreover, the company’s efficient capital deployment activities in the form of shares repurchase, regular payouts and dividend hikes seem impressive.
Nevertheless, the sluggish economic scenario, still low rate of interest and a stringent regulatory environment remain challenges for the company’s top-line growth in the coming quarters. Though the pressure on NIM is likely to ease in the long run with improvement in interest rates, we do not see signs of respite anytime soon.
Currently, Comerica carries a Zacks Rank #3 (Hold).
Performance of other Major Banks
The third-quarter earnings season kick started with Wall Street biggies – Wells Fargo & Company (WFC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). Driven by top-line growth, Wells Fargo earned $1.02 per share in third-quarter 2014, thereby surpassing 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.
JPMorgan came out with earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39. The number also compares favorably with $1.42 earned in the year-ago quarter. Earnings exclude the impact of 26 cents per share related to the after-tax Firmwide legal expense. Considering this significant one-time item, the company has earned $1.36 per share.
Citigroup reported yet another impressive quarter. Adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.
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