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Comerica Inc. (CMA - Analyst Report) reported third-quarter 2013 earnings per share of 78 cents, beating the Zacks Consensus Estimate of 71 cents and comparing favorably with 76 cents earned in the prior quarter. Net income was $147.0 million in the quarter, up 3% from $143.0 million in the prior quarter.

Comerica’s results reflect increased non-interest income and lower provisions for credit losses. Additionally, the company’s healthy capital position was a tailwind. However, a marginal lower net interest income and a slight increase in expenses were the headwinds.

On a fully taxable equivalent basis, Comerica’s total revenue (net of interest expenses) of $626 million in the quarter was up 0.5% sequentially. Further, it surpassed the Zacks Consensus Estimate of $617 million.

Quarter in Detail

Comerica’s net interest income dipped 0.5% sequentially to $412 million. The decline was mainly due to a decrease in interest on loans, partly offset by higher interest on mortgage-backed investment securities, rise in interests in short-term investments and decrease in funding costs.

Net interest margin declined 4 basis points (bps) sequentially to 2.79%. This was mainly due to an increase in excess liquidity and lower loan yields, partly offset by the impact of yield improvements on mortgage-backed securities and lower funding costs.

Average loans fell 2% to $44.1 billion sequentially. Average deposits nudged up 1% from the prior quarter to $51.9 billion.

Comerica’s non-interest income came in at $214 million, up 3% sequentially. The sequential rise was mainly due to increase in customer-driven as well as non-customer-driven fee income.

Non-interest expenses totaled $417 million, up 0.2% sequentially. The marginal rise was due to an increase in salaries and employee benefits expenses, partly offset by decrease in both litigation-related expenses and write-downs on other foreclosed assets.

Credit Quality

Credit quality was mixed at Comerica. Net credit-related charge-offs rose 12% sequentially but fell 56% year over year to $19 million.

Nonperforming assets to total loans and foreclosed property was 1.08% in the quarter, compared with 1.10% in the prior quarter and 1.71% in the year-ago quarter.

Provision for credit losses declined 38% sequentially and 64% year over year to $8 million. The allowance for loan losses to total loans ratio was 1.37% as of Sep 30, 2013, down from 1.35% as of Jun 30, 2013 and from 1.46% as of Sep 30, 2012.

For the final quarter of 2013, Comerica expects provisions for credit losses to be at a low level, similar to the first three quarters of 2013.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of Sep 30, 2013, total assets and common shareholders' equity were $64.7 billion and $7.0 billion respectively, compared with $62.9 billion and $6.9 billion as of Jun 30, 2013. The increase in total assets primarily reflected rise in excess liquidity, partially offset by a decrease in loans.

As of Sep 30, 2013, Comerica's tangible common equity ratio was 9.87%, down 17 bps sequentially. Moreover, as of Sep 30, 2013, the estimated Tier 1 common capital ratio moved up 31 bps sequentially to 10.74%. The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.4% as of Sep 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 1.7 million shares worth $72 million.

This, combined with dividend, resulted in a total payout of 70% 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 the final quarter of 2013. Given the challenging macroeconomic environment, the company’s outlook for fourth-quarter 2013 is a modest one.

The company expects average loans to be stable in the fourth-quarter 2013 compared to third-quarter 2013, assuming auto-dealer floor plan loans to rebound from a seasonal low and on expectations of a continued decline in mortgage warehouse lending and economic uncertainty.

Further, Comerica expects lower net interest income in the final quarter of 2013, due to continued pressure from the low rate environment and decrease in purchase accounting accretion.

Customer-driven non-interest income is expected to remain relatively stable, compared to third-quarter 2013, while noncustomer-driven noninterest income is projected to decrease.

Comerica expects lower non-interest expense in the final quarter of 2013, compared with the third quarter of 2013, on account of consistent and tight expense control.

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 opportunistic acquisition will also likely 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, Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corp. (BBT - Analyst Report) will report on Oct 17, while BankUnited, Inc. (BKU - Analyst Report) will do so on Oct 22.

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