Comerica Incorporated (CMA) reported first quarter 2011 net income of 57 cents per share, beating the Zacks Consensus Estimate of 48 cents and improving from the prior-quarter figure of 53 cents. However, earnings saw a striking year-over-year improvement from a loss of 46 cents.
The year-over-year improvement in the results reflected the increase in non-interest income and net interest margin, partially offset by higher non-interest expenses and lower net interest income. Furthermore, a significant improvement in credit quality also acted as a positive catalyst.
Net income attributed to common shareholders of Comerica totaled $102 million compared with a net loss of $71 million in the first quarter of 2010 and net income of $95 million in the fourth quarter of 2010.
Performance in Detail
Total revenue in the quarter was $602 million, down 2.9% sequentially and 3.3% year over year. However, total revenue was well above the Zacks Consensus Estimate of $587 million.
Net interest income (NII) fell approximately 2.5% from the prior quarter and 4.8% year over year to $395 million in the reported quarter. The sequential decline was due to the maturity of interest rate swaps at positive spreads.
Net interest margin (NIM) dropped 4 basis points (bps) sequentially but improved 7 bps year over year to 3.25% in the quarter. The NIM decrease reflected the impact of an increase in excess liquidity and the maturity of interest rate swaps at positive spreads.
In the reported quarter, non-interest income decreased 3.7% from the prior quarter but grew 15.6% year over year to $207 million.
Non-interest expenses during the reported quarter totaled $415 million, down 5.0% sequentially but up 2.7% year over year. The drop was principally driven by fall in expenditures on salaries, partially mitigated by increase in employee benefits expense.
Credit Quality
A significant improvement in credit quality was recorded during the reported quarter. Provision for loan losses of Comerica, during the quarter, plunged 14.0% sequentially and 72.0% year over year to $49 million. Lower provision resulted from a decline in the Global Corporate Banking, Private Banking, Commercial Real Estate, and Specialty Businesses business lines, partially offset by increase in the Middle Market business line.
Net credit-related charge-offs decreased $12 million sequentially to $101 million in the reported quarter. The decrease was mainly aided by a decline in Private Banking, Specialty Businesses, and Commercial Real Estate business lines, which was partially offset by an increase in Middle Market.
Comerica’s nonperforming assets decreased 10.6% sequentially and 11.8% year over year to $1,104 million as of March 31, 2011. Moreover, the company’s nonperforming loans stood at $1,030 million, declining 8.3% sequentially from $1,123 million and 11.4% year over year from $1,162 million.
Balance Sheet Position
As of March 31, 2011, total assets and common shareholders’ equity were $55.0 billion and $5.9 billion, respectively, compared with $53.7 billion and $5.8 billion, respectively, as of December 31, 2010.
Comerica’s tangible common equity ratio was 10.43% compared with 10.54% as of December 31, 2010. The estimated Tier 1 ratio was 10.37%, up from 10.13% as of December 31, 2010.
During the reported quarter, Comerica repurchased 400,000 shares of common stock in the open market under the share repurchase program. This share repurchase program was authorized by the company in the fourth quarter of 2010 and included authorization to repurchase up to 12.6 million shares of common stock in the open market and the purchase of outstanding warrants of up to 11.5 million shares of common stock.
Guidance for Fiscal Year of 2011
Management expects non-interest income to fall by a single digit year over year, significantly due to the impact of regulatory changes.
Management also projects a low single-digit increase in non-interest expenses compared with the prior year. The projection includes an increase in employee benefits expense.
NIM is guided to be in the range of 3.25% -3.30%, assuming no increase in the Federal Funds rate.
Management estimates net credit-related charge-offs in the range of $350 million to $400 million and provision for credit losses between $150 million and $200 million.
Performance by Peers
In Comerica’s peer group, KeyCorp. (KEY) reported positive first quarter results, substantially outpacing the Zacks Consensus Estimates. Results primarily benefited from growth in non-interest income, lower non-interest expense, and improvement in provision from credit losses. However, lower NII and average earning assets were among the negatives.
Another peer, M&T Bank Corporation’s (MTB), also reported first quarter operating earnings that exceeded the Zacks Consensus Estimate. Earnings also significantly expanded from the prior-year quarter results, aided by an increase in the NII on the back of NIM expansion, coupled with substantially lower provision for credit losses.
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 repay bailout money and dispose of preferred securities. However, its significant exposure to riskier areas, such as commercial real estate markets, lack of loan growth and the regulatory moves that would restrict its fee income growth, forms the downside.
Comerica currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
COMERICA INC (CMA): Free Stock Analysis Report
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M&T BANK CORP (MTB): Free Stock Analysis Report
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