Comerica ( CMA Quick Quote CMA - Free Report) delivered a third-quarter 2020 positive earnings surprise of 65.5%. Earnings per share of $1.44 easily surpassed the Zacks Consensus Estimate of 87 cents. However, bottom line came in lower than the prior-year quarter figure of $1.96.
The company’s results were supported by fall in provisions. Also, the capital position remained strong. Nevertheless, lower revenues, due to reduction in net interest and non-interest income, were recorded. Moreover, higher expenses and reduced loans balance were major drags.
Net income came in at $211 million in the quarter, down 27.7% year over year from $292 million.
Furthermore, segment wise, on a year-over-year basis, net income increased 5.2% at Commercial Bank. Retail and Wealth Management reported 81% and 23.7% declines in net income, respectively. The Finance segment reported net loss.
Revenues Fall on Low Rates, Expenses Rise
Comerica’s third-quarter net revenues were $710 million, down 15.7% year over year. However, the top line surpassed the Zacks Consensus Estimate of $693.9 million.
Net interest income slipped 22% on a year-over-year basis to $458 million in the quarter, on lower short-term rates. In addition, net interest margin contracted 119 basis points (bps) to 2.33%.
Total non-interest income came in at $252 million, down 1.6% on a year-over-year basis. Lower service charges on deposit accounts, commercial lending fees and foreign exchange income mainly affected the results, partly mitigated by increase in card fees and other non-interest income.
Non-interest expenses totaled $446 million, up 2.5% year over year. The upswing resulted chiefly from higher salaries and benefits expense, software expense and other non-interest expenses.
Efficiency ratio was 62.79% compared with the prior-year quarter’s 51.54%. A rise in ratio indicates a fall in profitability.
Solid Balance Sheet
As of Sep 30, 2020, total assets and common shareholders' equity were $83.6 billion and $7.9 billion, respectively, compared with $84.4 billion and $7.8 billion as of Jun 30, 2020.
Total loans declined 2% on a sequential basis to $52.4 billion. However, total deposits jumped 1.1% from the prior quarter to $68.5 billion.
Credit Quality: A Mixed Bag
Total non-performing assets increased 46.3% year over year to $335 million. Also, allowance for loan losses was $978 million, up 50%. Additionally, the allowance for loan losses to total loans ratio was 1.87% as of Sep 30, 2020, up from 1.27% on Sep 30, 2019.
However, provision for credit losses was $5 million, down significantly from the prior-year quarter’s $35 million. Further, net loan charge-offs jumped 21.4% to $33 million.
Strong Capital Position
As of Sep 30, 2020, the company's tangible common equity ratio was 8.24%, down 85 bps year over year. Common equity Tier 1 capital ratio was 10.26%, up from 9.96% r. Total capital ratio was 13.14%, up from 11.95%.
Q4 Outlook Compared With Q3
Comerica has provided guidance for fourth-quarter 2020 on expectations of gradual improvement in economic conditions.
Comerica expects average loans to decline. The outlook reflects decline in Mortgage Banker Finance due to a reduction in activity and the cyclical impacts on Middle Market, Large Corporate and Energy, partly offset by growth in National Dealer Services as inventory levels begin to slowly rebuild. Furthermore, average deposits are expected to be strong and relatively stable.
The company projects stable net interest income, affected by lower interest rates and reduced loan balances, partly offset by management of loan and deposit pricing, the full quarter benefit of the larger securities portfolio and lower wholesale funding.
Non-interest income is likely to decline on lower card fees, partially mitigated by growth in several fee categories due to improving economic conditions. Notably, higher bank-owned life insurance, securities trading income and deferred compensation levels recorded in the third quarter are not expected in the fourth.
Non-interest expenses are estimated to flare up, resulting from technology projects and seasonal impact of staff insurance. This is likely to be mostly offset by third quarter levels of deferred compensation and charitable contributions, which are not expected to be repeated.
Provisions for credit losses are expected to be reflective of economic environment, including pace of economic recovery. Net charge-offs are expected to be modestly higher.
Lastly, the company seeks to maintain strong capital levels with a focus on supporting growth as well as providing an attractive return to shareholders.
Comerica's prospects look promising as strategic initiatives are likely to boost performance. Also, lower provisions despite coronavirus-led chaos came as a tailwind. Nevertheless, restricted top-line expansion, eroded by a lower margin and fee income, is a concern.
Currently, Comerica carries a Zacks Rank #3 (Hold). You can see
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