Comerica Incorporated (CMA) reported third-quarter 2010 net income of 33 cents per share, below the Zacks Consensus Estimate of 41 cents and lower than prior quarter by 6 cents. However, results were far ahead of the prior-year quarter, as third-quarter 2009 had incurred a loss of 10 cents.
Results reflected decrease in net interest income, non interest income, net interest margin and higher non-interest expenses. However, improvement in credit quality was a positive catalyst.
Net income attributable to common shareholders of Comerica totaled $59 million, compared with a net loss of $16 million in the third quarter of 2009 and net income of $69 million in the second quarter of 2010.
Quarter in Detail
Net interest income improved approximately 5% year over year to $404 million in the third quarter of 2010. However, it compared unfavorably with $422 million recorded in the prior quarter, attributed to a decline in earning assets and net interest margin.
On the flip side, non-interest income declined 4% sequentially to $186 million, primarily due to a decrease in customer derivative income and foreign exchange income, partially offset by an increase in investment banking income. The income also decreased 41% year over year.
Total revenue as reported was $590 million, well below the Zacks Consensus Estimate of $617 million.
Net interest margin increased 55 basis points year over year to 3.23% in the quarter. Sequentially, it decreased 5 basis points, mainly due to negative impact of condensed deferred loan fees as a result of a high rate of loan prepayments in the first half of 2010. Further, increased prepayments on higher-yielding mortgage-backed investment securities in the third quarter of 2010 also negatively affected the margin.
Non interest expense during the third quarter of 2010 totaled $402 million, up 0.8% year over year and 1.3% sequentially. The increase was principally attributed to an increase in salaries expense and employee benefits expense, partially offset by a decline in the provision for credit losses on lending-related commitments.
Credit Quality
Provision for loan losses of Comerica during the quarter fell a whopping 61% year over year to $122 million and declined 0.3% sequentially. Lower provision was the result of decline in the Middle Market, Energy Lending and Entertainment Lending business lines. However, increases in the Private Banking and Commercial Real Estate business lines partially offset these decreases.
Net credit-related charge-offs decreased 82 basis point year over year and 12 basis points sequentially to 1.32% in the third quarter of 2010. The decrease was mainly aided by a decline in Middle Market business line, which was partially offset by an increase in the Commercial Real Estate business line, largely in the Western and Midwest markets.
The company’s non-performing loans declined marginally year over year from $1,196 million, while increased 6% sequentially to $1,191 million.
However, Comerica’s non-performing assets increased 0.5% year over year and 8% sequentially to $1,311 million as of September 30, 2010.
Overall, improvement in credit quality was recorded, which aided to a decrease in net charge-offs, provision for credit losses, and partially offset by an increase in non-performing assets.
Capital Ratio
As of September 30, 2010, Comerica’s tangible common equity ratio was 10.39% compared with 10.11% as of June 30, 2010. The estimated Tier 1 common ratio increased 16 basis points sequentially to 9.97%. The estimated Tier 1 capital ratio was 9.97%, down from 10.64% as of June 30, 2010, reflecting the redemption of the trust preferred securities.
Guidance for Fourth Quarter of 2010
Management expects non-interest income to fall by single-digit sequentially. Further, it expects market-related fees to be lower due to vigilant nature of customers in a sluggish and uncertain economic environment.
It projects a low single-digit increase in non-interest expenses compared with the third quarter of 2010. The projection includes an estimated $5 million negative impact reflecting accumulation of the remaining original issuance discount on the redemption of trust preferred securities.
Management expects net interest margin to be in the range of 3.30% – 3.35% based on a decline in excess liquidity.
Management estimates net credit-related charge-offs to be in line with the third quarter of 2010, and provision for credit losses to be below net credit-related charge-offs.
Performance by Peers
In Comerica’s peer group, Bank of America Corporation (BAC) and Citigroup Inc. (C) reported positive results surpassing the Zacks Consensus Estimates. The impressive results were primarily bolstered by a slowdown in provision for credit losses for both the banks.
Our Take
Comerica’s strategic expansion efforts and focus on cost containment augur well to some extent. The solid balance sheet and liquidity position has helped the company to repay bailout money and dispose of preferred securities. However, its significant exposure to the riskier areas, such as commercial real estate markets, lack of loan growth and the recent regulatory moves that would restrict its fee income growth, are downsides.
We maintain our Neutral recommendation on Comerica with a quantitative Zacks #3 Rank, indicating no clear directional pressure on the shares over the near term.
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