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Comerica Inc. reported second-quarter 2013 earnings of 76 cents per share, beating the Zacks Consensus Estimate as well as the prior quarter earnings of 70 cents. Net income was $143.0 million in the quarter, up 7% from $134.0 million recorded in the prior quarter.

Comerica’s results reflect increased non-interest income and reduced expenses. Further, growth in average loans, deposits and improved credit metrics were the positives. However, a marginal decline in net interest income was the headwind.

On a fully taxable equivalent basis, Comerica’s total revenue (net of interest expenses) of $623 million in the quarter was up 1% sequentially. However, it surpassed the Zacks Consensus Estimate of $621 million.

Quarter in Detail

Comerica’s net interest income dipped 0.5% sequentially to $414 million. The decline was mainly due to a decrease in the accretion of the purchase discount on the acquired loan portfolio, a decrease in loan yields (due to shifts in the loan portfolio mix), reinvestment yields on mortgage-backed investment securities as well as average balances. These negatives were partly offset by an additional day in second-quarter 2013, an increase in loan volumes and declining funding costs.

Net interest margin declined 5 basis points (bps) sequentially to 2.83%. The sequential decline was mainly due to lower accretion on the acquired loan portfolio, lower loan yields and an increase in liquidity, partially offset by declining funding costs.

Average loans grew 1% to $44.9 billion sequentially. Average deposits nudged up 1% from the prior quarter to $51.4 billion.

Comerica’s non-interest income came in at $208 million, up 4% sequentially. The sequential rise was mainly due to increases in customer-driven as well as non-customer-driven fee income and an annual incentive received from the company’s third-party credit card provider.

Non-interest expenses totaled $416 million, unchanged sequentially. The decline in salary expenses was offset by a $4 million write-down on other foreclosed assets and a rise in outside processing fee expense.

Credit Quality

Credit quality improved at Comerica. Net credit-related charge-offs fell 29% sequentially and 62% year over year to $17 million.

Nonperforming assets to total loans and foreclosed property was 1.10% in the quarter, compared with 1.23% in the prior quarter and 1.85% in the year-ago quarter.

Provision for credit losses declined 19% sequentially and 32% year over year to $13 million. The allowance for loan losses to total loans ratio was 1.35% as of Jun 30, 2013, down from 1.37% as of Mar 31, 2013 and from 1.52% as of Jun 30, 2012.

For the year 2013, Comerica expects provisions for credit losses to decline due to lower nonperforming loans and net charge-offs, partially offset by loan growth. The provision for credit losses for the second half of 2013 is expected to be similar to the provision for the first half of 2013.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of Jun 30, 2013, total assets and common shareholders' equity were $62.9 billion and $6.9 billion respectively, compared with $64.9 billion and $7.0 billion as of Mar 31, 2013.

As of Jun 30, 2013, Comerica's tangible common equity ratio was 10.04%, up 18 bps sequentially. Moreover, as of Jun 30, 2013, the estimated Tier 1 common capital ratio moved up 4 bps sequentially to 10.41%. The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.1% as of Jun 30, 2013.

Capital Deployment Update

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, the company repurchased 1.9 million shares worth $72 million.

This, combined with dividend, resulted in a total payout of 72% of net income to shareholders in the quarter. We expect such activities to boost investors’ confidence in the stock.

Outlook for 2013

Comerica has given an updated outlook for 2013. Given the currently challenging macroeconomic environment, the company’s outlook for full-year 2013 is a modest one. The company expects growth in average loans to continue despite the economic uncertainty, given the continued focus on prudent pricing and structure management.

Further, Comerica expects lower net interest income, reflecting both a decline in purchase accounting accretion and the effect of persistent low rates, partly offset by loan growth. Purchase accounting accretion is expected to be in the range of $25–$30 million for full-year 2013, compared with $71 million in full-year 2012.

Customer-driven non-interest income is expected to remain relatively stable, reflecting the impact of cross-sell initiatives, partly offset by regulatory pressures on certain fees.

Comerica expects lower non-interest expense, reflecting further cost savings by the company due to tight expense control and no restructuring expenses. Additionally, the company expects effective tax rate of around 27.5%.

Our Take

Going forward, we expect Comerica’s continuous geographic diversification beyond its traditional and slower-growing Midwest markets to drive growth in the next cycle. Revenue synergies from the Sterling acquisition should augment top-line growth.

However, 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.

Currently, Comerica carries a Zacks Rank #3 (Hold). Among other major banks, The Bank of New York Mellon Corp , Bank of America Corp and The PNC Financial Services Group are scheduled to report second-quarter 2013 results on Jul 17.

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