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Comerica (CMA) Down 5.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Comerica (CMA - Free Report) . Shares have lost about 5.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Comerica due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Comerica Q3 Earnings Beat Estimates, Revenues Increase

Comerica’s third-quarter 2018 adjusted earnings per share of $1.86 surpassed the Zacks Consensus Estimate of $1.76. Also, the results compared favorably with year-ago adjusted figure of $1.27. 

Higher revenues and improved credit metrics were recorded. Moreover, the capital position was strong. However, lower deposits and loans remained an undermining factor. Also, higher expenses were a headwind.

Including certain non-recurring items, net income came in at $318 million, up 40.7% from $226 million reported in the year-ago quarter.

Segment wise, on a year-over-year basis, net income increased 27.5% at Business Bank and 61.1% at Wealth Management. Retail Bank segment recorded net income against net loss in the prior-year quarter. Finance segment reported loss in the current quarter, consistent with year-ago quarter.

Revenues and Expenses Increase

Comerica’s third-quarter adjusted revenues were $853 million, up 7.8% year over year. The Zacks Consensus Estimate was $852.7 million.

Net interest income increased 9.7% to $599 million. Moreover, net interest margin expanded 32 basis points (bps) to 3.60%.

Adjusted non-interest income came in at $254 million, up 3.7% on a year-over-year basis. Higher card fees, fiduciary income and other non-interest income were partially offset by decreased service charge on deposits. After considering certain one-time items, non-interest income tanked 14.9% year over year. 

Further, adjusted non-interest expenses totaled $440 million, up 3.3% year over year. The rise was chiefly due to increase in salaries and benefits expense and higher outside processing fee partially offset by lower software and FDIC insurance expense. Including one-time items, non-interest expenses declined 2.4% from year-ago quarter.

Balance Sheet Position Weakens

As of Sep 30, 2018, total assets and common shareholders' equity were $71.4 billion and $7.8 billion, respectively, compared with $72 billion and $8.1 billion as of Sep 30, 2017.

Total loans fell 1.6% year over year to $49 billion. Also, total deposits decreased about 2% from the prior-year quarter to $56 billion.

Credit Quality Improves

Total non-performing assets plunged 48% year over year to $240 million. Also, allowance for loan losses was $697 million, down 7.4% from the prior-year period. Additionally, allowance for loan losses to total loans ratio was 1.35% as of Sep 30, 2018, down from 1.45% as of Sep 30, 2017. In addition, nil provision for credit losses was reported against $24 million in the year-ago quarter.

Furthermore, Comerica reported net charge-offs of $15 million compared with $25 million recorded in prior-year quarter.

Strong Capital Position

As of Sep 30, 2018, the company's tangible common equity ratio was 10.09%, down 26 bps year over year. Common equity tier 1 capital ratio was 11.66%, up from 11.51% reported in the year-ago quarter. Total risk-based capital ratio was 13.74%, up from 13.65% in the prior-year quarter.

Capital Deployment Update

Comerica’s capital-deployment initiatives highlight the company’s capital strength. During the reported quarter, Comerica repurchased 5.1 million shares under its existing equity repurchase program. This, combined with dividends, resulted in a total payout of $600 million to shareholders.

Impressive Outlook for Q4

Comerica guided for fourth-quarter 2018, taking into consideration the current economic and rate environment, along with the GEAR Up initiative.

The company anticipates higher net interest income, including the benefit of short-term rate increase and securities portfolio restructuring. Notably, higher average debt as well as lower interest recoveries and loan fees are expected to partially offset the benefit.

Non-interest income is predicted to remain stable, excluding securities losses, BOLI and deferred compensation asset returns. Notably, GEAR Up initiatives are expected to remain on track and help drive growth in card fees and fiduciary income.

Comerica expects average loans to be stable. The outlook reflects rise across most lines of business including seasonal rise in National Dealer, partially offset by decline in Mortgage Banker portfolio.

Average deposits are expected to increase in the fourth quarter consistent with normal seasonal patterns, but not at the same magnitude as seen in past years.

Non-interest expenses are likely to rise modestly, excluding restructuring charges of nearly $10 million. Persistent higher technology and outside processing expenditures and typical inflationary pressures are likely to occur. At the same time, GEAR Up savings are likely to remain on track.

Provision for credit losses is likely to be $10-$20 million and net charge-offs are expected to be low.

The company has remaining repurchase authority of up to 500 million shares in the fourth quarter, which it expects to facilitate through an accelerated share repurchase program.

Income tax expenses are expected to approximate 23% of pre-tax income, excluding further tax impact from employee stock transactions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Comerica has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Comerica has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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