After reporting encouraging results in the first quarter of 2012, Comerica Inc. (CMA) has again come up with an impressive second quarter. The company reported earnings per share of 73 cents, comfortably beating the Zacks Consensus Estimate of 62 cents. Results also compared favorably with earnings per share of 66 cents in the prior quarter and 53 cents in the year-ago quarter.
Comerica’s results reflect growth in its top line. The company experienced growth in its average loans, helped by higher average commercial loans. Average deposits also advanced in the quarter. However, lower loan yields partially offset the benefit. Furthermore, the company experienced growth in fee income. Also, expenses were well-controlled.
Comerica’s total revenue of $681 million in the reported quarter remained flat sequentially and advanced 8% year over year. Total revenue also surpassed the Zacks Consensus Estimate of $638 million.
Quarter in Detail
Comerica’s net interest income decreased 2% sequentially to $435 million in the reported quarter. Sequentially, the benefit from an increase in average loans was offset by a decrease in the accretion of the purchase discount on the acquired Sterling loan portfolio and lower loan yields.
However, net interest income advanced 11% from the prior-year period. Net interest margin fell 9 basis points (bps) sequentially and 4 bps year over year to 3.10%.
Average total loans advanced 2% sequentially as a result of an increase of 5% in commercial loans, partially offset by a decrease of 2% in commercial real estate loans. Average deposits increased 1% from the prior quarter, largely attributable to an increase of 2% in noninterest-bearing deposits.
In the reported quarter, Comerica’s non-interest income was $211 million, up 2% sequentially and 4% year over year. The sequential uptick primarily resulted from a $5 million annual incentive bonus received in the quarter from the company's third party credit card provider, higher customer-driven fee income and an increase in net income from principal investing and warrants.
Non-interest expenses totaled $433 million, down 4% sequentially. The decline was primarily driven by a decrease in salaries expense and smaller declines in several other categories of non-interest expenses, partially offset by an increase in merger and restructuring charges related to the Sterling acquisition. However, expenses were up 5% year over year.
Credit Quality
Credit quality continued to be solid at Comerica. Net credit-related charge-offs remained stable sequentially at $45 million and fell from $90 million in the year-ago quarter.
Nonperforming assets to total loans and foreclosed property equaled 1.85% in the reported quarter, down from 2.14% in the prior quarter and 2.66% in the year-ago quarter.
Provision for credit losses fell 14% sequentially and 58% year over year to $19 million. The allowance for loan losses to total loans ratio was 1.52% as of June 30, 2012, down from 1.64% as of March 31, 2012, and 2.06% as of June 30, 2011.
For rest of the year, the company expects provision and net charge-offs to be at or near the second quarter levels.
Capital Position
During the reported quarter, Comerica’s capital levels remained strong. As of June 30, 2012, total assets and common shareholders' equity were $62.7 billion and $7.0 billion, respectively, compared with $62.6 billion and flat with $7.0 billion, respectively, as of March 31, 2012.
As of June 30, 2012, Comerica's tangible common equity ratio was 10.27%, up 6 bps sequentially. Moreover, the estimated Tier 1 common capital ratio moved up 5 bps sequentially to 10.32% as of June 30, 2012.
Capital Deployment Update
Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. Following the Federal Reserve’s consent to its capital plan, the company made a 50% hike in its quarterly cash dividend in April 2012.
Moreover, it also authorized the repurchase of additional shares of common stock (by about 6 million shares) to execute its capital plan. The plan provided for up to $375 million in equity repurchases between first quarter 2012 and first quarter 2013.
Notably, during the reported quarter, Comerica had bought back 2.9 million shares for a total of $88 million. This, combined with increased dividend, resulted in a total payout of 81% net income to shareholders in the second quarter. We expect such activities to boost to investors’ confidence in the stock.
Outlook 2012
Comerica has provided a detailed outlook for 2012. Given the continuity of the current economic environment, Comerica’s outlook for full year 2012 is a modest one. Compared to the full year 2011 level, management expects a 3–5% increase in net interest income, supported by 5–6% growth in average loans.
Non-interest income is projected to expand 1– 2% while non-interest expenses are anticipated to rise or fall 1%. Net credit-related charge-offs and provision for credit losses are likely to exhibit a declining trend.
Peer Performance
One of the closest peers of Comerica, M&T Bank Corporation’s (MTB) second quarter 2012 operating earnings of $1.82 per share were significantly above the Zacks Consensus Estimate of $1.68.
The results were aided by increased net interest and non-interest income as well as lower operating expenses. Mortgage banking revenues posted a decent rise in the quarter. Moreover, improved capital ratios also reflected the company’s strong capital position. However, the mixed credit metrics were the dampeners.
Besides Comerica and M&T Bank, a number of major Wall Street Banks such as JPMorgan Chase & Company (JPM), Wells Fargo & Company (WFC) and Citigroup Inc. (C) have also reported better-than-expected results this quarter. We believe this will help in sustaining a positive mood in the market.
Our Take
Going forward, we believe that Comerica’s continuous geographic diversification beyond its traditional and slower-growing Midwest markets could drive growth over the next cycle. Revenue synergies from the Sterling acquisition should augment its top-line growth. The company also announced hikes in dividend and share buyback, which augur well for investors.
Yet, the company’s significant exposure to riskier areas such as commercial real estate markets, unsettled economic environment, low interest rate and regulatory issues are concerns.
Comerica currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals we have a Neutral recommendation the stock.
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