STT State Street Corporation

Comerica Inc. (CMA) reported first quarter 2013 earnings of 70 cents per share, beating the Zacks Consensus Estimate of 67 cents. Moreover, results surpassed the year-ago quarter earnings per share of 68 cents.

Comerica’s results reflected reduced expenses. Further, growth in average loans and improved credit metrics were positives. However, a decline in revenues was the headwind.

The company reported a net income of $134.0 million, up 3% from $130.0 million recorded in the prior quarter.

Comerica’s total revenue of $646 million in the quarter was down 2% sequentially. However, it surpassed the Zacks Consensus Estimate of $620 million.

Quarter in Detail

Comerica’s net interest income declined 2% sequentially to $416 million. The decline was mainly due to two lesser days of operation in the reported quarter, lower loan yields due to shifts in the loan portfolio mix, decline in LIBOR, lower accretion of the purchase discount on the acquired loan portfolio and lower reinvestment yields on mortgage-backed investment securities and a decrease in average balances. These negatives were partly mitigated by an increase in loan volumes and a decrease in funding costs.

Net interest margin went up by 1 basis point sequentially to 2.88%. The sequential increase was mainly due to the benefit provided by a decrease in excess liquidity and lower deposit costs, partially offset by lower loan yields, lower accretion on the acquired loan portfolio and lower yields on mortgage-backed investment securities.

Average loans marginally grew 1% to $44.6 billion sequentially. This was driven by an increase in commercial loans, partially offset by a decrease in combined commercial mortgage and real estate construction loans. Average deposits decreased 1% from the prior quarter to $50.7, largely attributable to a decrease in non interest-bearing deposits.

Comerica’s non-interest income came in at $200 million, down 2% sequentially. The sequential decline was mainly due to decreases in customer derivative income and commercial lending fees, partially offset by a seasonal increase in service charges on deposit accounts.

Non-interest expenses totaled $416 million, down 3% sequentially. The decrease was mainly due to a decline in salaries expense and severance expense, decreased net occupancy expense, lower restructuring expenses and other real estate expense, partially offset by an increase in employee benefits expense on the back of higher pension expense.

Credit Quality

Credit quality showed improvement at Comerica. Net credit-related charge-offs declined 35% sequentially and 47% year over year to $24 million.

Non-performing assets to total loans and foreclosed property stood at 1.23% in the reported quarter compared with 1.29% in the prior quarter and 2.14% in the year-ago quarter.

Provision for credit losses remained stable sequentially but declined 27% year over year to $16 million. The allowance for loan losses to total loans ratio was 1.37% as of Mar 31, 2013, stable compared with Dec 31, 2012, but down from 1.64% as of Mar 31, 2012.

For the year 2013, Comerica expects stable provision for credit losses, attributable to loan growth but somewhat offset by a decline in non-performing loans and net charge-offs.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of Mar 31, 2013, total assets and common shareholders' equity were $63.5 billion and $7.0 billion compared with $64.3 billion and $7.1 billion, respectively, as of Dec 31, 2012.

As of Mar 31, 2013, Comerica's tangible common equity ratio was 9.86%, up 10 bps sequentially. Moreover, as of Mar 31, 2013, the estimated Tier 1 common capital ratio moved up 23 bps sequentially to 10.40%.

Capital Deployment Update

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, Comerica bought back 2.1 million shares worth $71 million under its 2012 Capital Plan. This, combined with dividend, resulted in a total payout of 77% of net income to shareholders in the quarter. We expect such activities to further boost investors’ confidence in the stock.

Outlook 2013

Comerica has given an updated outlook for 2013. Given the continuation of the current economic environment, the company’s outlook for full year 2013 is a modest one. Compared to the full-year 2012 level, management expects reduced net interest income, attributable to a decline of $40 million-$50 million in purchase accounting accretion and the effect of a low rate environment, partially mitigated by loan growth.

Customer-driven non-interest income is projected to remain relatively stable, reflecting cross-sell initiatives and selective pricing adjustments, partially offset by regulatory pressures on certain products, such as customer derivatives. Further, non-interest expenses are anticipated to fall due to cost savings based on tight expense control and no restructuring expenses. Income tax expense is anticipated to be roughly 27.5% of pre-tax income.

Comerica also anticipates continued growth in average loans, albeit at a slower pace, with economic uncertainty impacting demand and a continued focus on maintaining pricing and structure discipline in a competitive environment.

Our Take

Going forward, we believe 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 top-line growth.

Yet, the company’s significant exposure to commercial real estate markets, the unsettled economic environment, low interest rate and stringent regulatory issues remain matters of concern.

Among other major banks, The Bank of New York Mellon Corporation (BK) and Bank of America Corporation (BAC) are scheduled to report their first quarter 2013 results on Apr 17, whereas State Street Corporation (STT) is scheduled to report on Apr 19.

Currently, Comerica carries a Zacks Rank #3 (Hold).

 
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