Comerica Incorporated (CMA - Analyst Report) has continued its earning streak by delivering the sixth consecutive earnings beat in second-quarter 2014. Earnings per share of 80 cents came well above the Zacks Consensus Estimate and the prior-year figure of 76 cents.
Net income was $151 million in the quarter, up 5.6% from the year-ago quarter.
Results benefited from a decline in both operating expenses and provision for credit losses. However, the top line slightly deteriorated due to a decrease in non interest income. Nevertheless, the company’s healthy capital position, improving credit quality and strong capital deployment activities were tailwinds for the quarter.
Furthermore, segment-wise, on a year-over-year basis, net income of Retail Bank increased 36.4% to $15 million and Wealth Management increased 16.7% to $28 million. However, Business Bank segment‘s net income fell 5.8% at $195 million.
Quarter in Detail
Comerica’s total revenue of $661 million in the quarter was down 0.6% year over year. However, it beat the Zacks Consensus Estimate of $626 million.
Comerica’s net interest income increased 0.5% year over year to $416 million in the quarter. The increase was primarily due to lower interest expenses and a higher interest income on investment securities. However, net interest margin fell 5 basis points (bps) year over year to 2.78%.
Comerica’s non-interest income came in at $220 million, down nearly 1% from the prior-year quarter.
Non-interest expenses totaled $404 million, down 2.9% on a year-over-year basis. The decrease was mainly due to a reduction in salaries and employee benefits expense as well as other expenses.
As of Jun 30, 2014, total assets and common shareholders' equity were $65.3 billion and $7.4 billion respectively, compared with $62.9 billion and $6.9 billion as of Jun 30, 2013.
Net loans were up 5.5% year over year to $47.3 billion, while total deposits rose 5.7% from the prior-year quarter to $58.0 billion.
Credit quality significantly improved at Comerica in the quarter. Total non performing assets declined 28.0% year over year to $360 million. Net loan charge-offs fell 47.1% year over year to $9 million.
Further, provision for credit losses declined 15.4% year over year to $11 million. Allowance for loan losses stood at $591 million, down 3.6% from the prior-year period. Also, the allowance for loan losses to total loans ratio was 1.23% as of Jun 30, 2014, down from 1.35% as of Jun 30, 2013.
For 2014, Comerica expects provisions for credit losses to remain flat based on improvement in credit quality.
During the reported quarter, Comerica’s capital levels remained strong.
As of Jun 30, 2014, Comerica's tangible common equity ratio was 10.39%, up 35 bps year over year. Moreover, the estimated Tier 1 common capital ratio moved up 6 bps year over year to 10.49%.
The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.2% as of Jun 30, 2014, compared with 10.1% in the prior-year quarter. This ratio excludes most factors of accumulated other comprehensive income (AOCI).
Capital Deployment Update
Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, Comerica repurchased 1.2 million shares under its share repurchase program. This, combined with dividends, resulted in total payout of 63% of second-quarter net income to shareholders.
Outlook for 2014
Comerica has given an updated outlook for the year 2014, which excludes around $32 million gain on early redemption of debt in Jul 2014. Given the sluggish growth in the economy and low-interest rate environment, the company’s outlook for 2014 is modest.
The company expects average loans to grow within a range of 4–6% in 2014. The anticipation reflects growth of loans in the first half along with probable growth in the later part. It considers seasonal declines in both National Dealer Services and Mortgage Banker Finance and performance in the other business portfolios, which slowed down through the second quarter.
Further, Comerica expects lower net interest income in 2014 due to persistent pressure from the low rate environment and decrease in purchase accounting accretion. These negatives are expected to be partially offset by loan growth.
Non-interest income is expected to exhibit a moderate decline due to lower non-customer driven income. However, customer driven fee income is projected to remain flat. Comerica expects lower non-interest expense in 2014 on account of a 50% reduction in pension expense and lower legal expenses.
We remain encouraged as Comerica reported yet another impressive quarter. Going forward, we expect synergies from Comerica’s strategic acquisitions to support its top-line growth. Moreover, the company’s efficient capital deployment activities in the form of shares repurchase, regular payouts and dividend hikes seem impressive as well.
Nevertheless, the sluggish economic scenario, still low rate of interest and a stringent regulatory environment remain challenges to the company’s top-line growth in the coming quarters. Though the pressure on NIM is likely to ease in the long run with improvement in interest rates, we do not see signs of respite anytime soon.
Currently, Comerica carries a Zacks Rank #2 (Buy).
Performance of Other Wall Street Major
The earnings season this quarter started with Wall Street banking giants like Wells Fargo & Company (WFC - Analyst Report). The company’s earning per share of $1.01 came in line with the Zacks Consensus Estimate. However, the reported figure came above the prior-year-quarter earnings.
Citigroup Inc. (C - Analyst Report) reported yet another impressive quarter with adjusted earnings per share of $1.24 in second-quarter 2014, outpacing the Zacks Consensus Estimate of $1.08. However, earnings were below the year-ago figure by a penny.
Another major bank, Fifth Third Bancorp (FITB - Analyst Report) is scheduled to report its second-quarter results on Jul 17.