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Comerica Inc. (CMA - Free Report) delivered a 13.2% positive earnings surprise for second-quarter 2016 on higher interest income. The company reported adjusted earnings per share of 77 cents, beating the Zacks Consensus Estimate of 68 cents. Moreover, the reported figure compared favorably with the prior-year quarter earnings of 73 cents.
Elevated net interest income and non-interest income were the upsides. However, higher expenses and increased provisions acted as headwinds.
Net income came in at $104 million, down 23% year over year. This figure includes a restructuring charge of $53 million.
Furthermore, segment-wise, on a year-over-year basis, net income at Business Bank and Wealth Management decreased 14.9% and 50%, respectively, while Finance and Retail Bank reported a loss.
Higher Interest Income Offsets Increased Expenses
Comerica’s second-quarter net revenue was $714 million, up 5.2% year over year. However, the figure lagged the Zacks Consensus Estimate of $717 million.
Net interest income increased 5.7% on a year-over-year basis to $445 million. Moreover, net interest margin inched up 9 basis points (bps) to 2.74%.
Total non-interest income came in at $269 million, up 4.3% year over year. Increased card fees, foreign exchange income and other non-interest income mainly led to the rise.
Non-interest expenses totaled $519 million, up 19.9% year-over-year. The rise was primarily due to higher restructuring charges, software expenses and FDIC insurance expenses. However, lower salaries and benefits expense and other non-interest expenses mostly offset the rise.
A Stable Balance Sheet
As of Jun 30, 2016, total assets and common shareholders' equity were $71.3 billion and $7.7 billion, respectively, compared with $69.9 billion and $7.5 billion as of Jun 30, 2015.
Total loans were slightly up on a year-over-year basis to $50.4 billion. However, total deposits decreased modestly from the prior-year quarter to $56.4 billion.
Credit Quality Deteriorated
Total non-performing assets jumped 71.6% year-over-year to $635 million. Net loan charge-offs increased significantly on a year-over-year basis to $42 million. Additionally, the allowance for loan losses to total loans ratio was 1.45% as of Jun 30, 2016, up from 1.24% as of Jun 30, 2015.
Moreover, provision for credit losses increased 4.3% year over year to $49 million. Allowance for loan losses was $729 million, up from $618 million in the prior-year period.
Capital Position Strengthened
As of Jun 30, 2016, the company's tangible common equity ratio was 9.98%, up 6 bps year over year. Common equity Tier 1 capital ratio was 10.48%. This ratio reflects transition provisions and excludes most factors of accumulated other comprehensive income.
Share Repurchase
Comerica repurchased 1.5 million shares worth $65 million under its existing equity repurchase program during the quarter.
Impressive Outlook for 2016
Comerica guided for 2016 taking into consideration the persistent current economic and low-rate environment.
The company expects higher net interest income based on the short-term rate increase in Dec 2015, loan growth and a bigger securities portfolio.
Non-interest income is expected to be modestly higher. Growth in fee income, mainly card fees, commercial lending fees and investment banking fees, aided by derivative income and warrant income is expected. Moreover, cross-sell opportunities, including wealth management products such as fiduciary and brokerage services, are anticipated to benefit.
Non-interest expenses are expected to be moderately higher. Rise in expenses reflect high restructuring expenses, outside processing expenses, FDIC insurance expense due to recent regulatory surcharge and high costs on inflationary pressures, partially offset by the related GEAR Up expense savings.
Provision for credit losses are expected to be higher, reflecting reserve builds for Energy in first-quarter 2016. Net charge-offs are expected in the range of 35–45 bps. Additional reserve changes are dependent on developments in the oil and gas sector. However, strong credit quality is expected in the remainder of the portfolio, excluding Energy.
Comerica expects average loan growth to be reasonably higher, in line with Gross Domestic Product growth. The outlook reflects persistent decrease in energy business, mostly offset by improvement in other lines of business. Seasonality in National Dealer Services, Mortgage Banker and Middle Market is expected to impact the results in the second half of 2016.
Our Viewpoint
The consistent improvement in the loan portfolio and capital position is expected to offset the pressure on revenues to some extent. Further, the company’s efficient capital deployment activities in the form of shares repurchase, regular payouts and dividend hikes seem impressive.
However, regulatory issues, deteriorating credit metrics and rising expenses remain major concerns.
Currently, Comerica carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Banking major – JPMorgan Chase & Co. (JPM - Free Report) – reported second-quarter 2016 earnings of $1.55 per share, outpacing the Zacks Consensus Estimate of $1.43, primarily driven by improved fixed income and equity trading revenues, and rise in mortgage banking fees. Further, higher net interest income, perhaps attributable to the rise in loan demand and favorable impact from the Fed’s Dec rate hike supported top line.
Wells Fargo & Company’s (WFC - Free Report) second-quarter 2016 earnings recorded a negative surprise of about 1%. Earnings of $1.01 per share lagged the Zacks Consensus Estimate by a penny. Moreover, it compared unfavorably with the prior-year quarter’s earnings of $1.03 per share.
A fall in operating expenses drove Citigroup Inc. (C - Free Report) to deliver a positive earnings surprise of nearly 15% in second-quarter 2016. The company’s earnings from continuing operations for the quarter surpassed the Zacks Consensus Estimate. However, earnings declined 17% on a year-over-year basis.
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Comerica's (CMA) Q2 Earnings Beat Despite Higher Expenses
Comerica Inc. (CMA - Free Report) delivered a 13.2% positive earnings surprise for second-quarter 2016 on higher interest income. The company reported adjusted earnings per share of 77 cents, beating the Zacks Consensus Estimate of 68 cents. Moreover, the reported figure compared favorably with the prior-year quarter earnings of 73 cents.
Elevated net interest income and non-interest income were the upsides. However, higher expenses and increased provisions acted as headwinds.
Net income came in at $104 million, down 23% year over year. This figure includes a restructuring charge of $53 million.
Furthermore, segment-wise, on a year-over-year basis, net income at Business Bank and Wealth Management decreased 14.9% and 50%, respectively, while Finance and Retail Bank reported a loss.
Higher Interest Income Offsets Increased Expenses
Comerica’s second-quarter net revenue was $714 million, up 5.2% year over year. However, the figure lagged the Zacks Consensus Estimate of $717 million.
Net interest income increased 5.7% on a year-over-year basis to $445 million. Moreover, net interest margin inched up 9 basis points (bps) to 2.74%.
Total non-interest income came in at $269 million, up 4.3% year over year. Increased card fees, foreign exchange income and other non-interest income mainly led to the rise.
Non-interest expenses totaled $519 million, up 19.9% year-over-year. The rise was primarily due to higher restructuring charges, software expenses and FDIC insurance expenses. However, lower salaries and benefits expense and other non-interest expenses mostly offset the rise.
A Stable Balance Sheet
As of Jun 30, 2016, total assets and common shareholders' equity were $71.3 billion and $7.7 billion, respectively, compared with $69.9 billion and $7.5 billion as of Jun 30, 2015.
Total loans were slightly up on a year-over-year basis to $50.4 billion. However, total deposits decreased modestly from the prior-year quarter to $56.4 billion.
Credit Quality Deteriorated
Total non-performing assets jumped 71.6% year-over-year to $635 million. Net loan charge-offs increased significantly on a year-over-year basis to $42 million. Additionally, the allowance for loan losses to total loans ratio was 1.45% as of Jun 30, 2016, up from 1.24% as of Jun 30, 2015.
Moreover, provision for credit losses increased 4.3% year over year to $49 million. Allowance for loan losses was $729 million, up from $618 million in the prior-year period.
Capital Position Strengthened
As of Jun 30, 2016, the company's tangible common equity ratio was 9.98%, up 6 bps year over year. Common equity Tier 1 capital ratio was 10.48%. This ratio reflects transition provisions and excludes most factors of accumulated other comprehensive income.
Share Repurchase
Comerica repurchased 1.5 million shares worth $65 million under its existing equity repurchase program during the quarter.
Impressive Outlook for 2016
Comerica guided for 2016 taking into consideration the persistent current economic and low-rate environment.
The company expects higher net interest income based on the short-term rate increase in Dec 2015, loan growth and a bigger securities portfolio.
Non-interest income is expected to be modestly higher. Growth in fee income, mainly card fees, commercial lending fees and investment banking fees, aided by derivative income and warrant income is expected. Moreover, cross-sell opportunities, including wealth management products such as fiduciary and brokerage services, are anticipated to benefit.
Non-interest expenses are expected to be moderately higher. Rise in expenses reflect high restructuring expenses, outside processing expenses, FDIC insurance expense due to recent regulatory surcharge and high costs on inflationary pressures, partially offset by the related GEAR Up expense savings.
Provision for credit losses are expected to be higher, reflecting reserve builds for Energy in first-quarter 2016. Net charge-offs are expected in the range of 35–45 bps. Additional reserve changes are dependent on developments in the oil and gas sector. However, strong credit quality is expected in the remainder of the portfolio, excluding Energy.
Comerica expects average loan growth to be reasonably higher, in line with Gross Domestic Product growth. The outlook reflects persistent decrease in energy business, mostly offset by improvement in other lines of business. Seasonality in National Dealer Services, Mortgage Banker and Middle Market is expected to impact the results in the second half of 2016.
Our Viewpoint
The consistent improvement in the loan portfolio and capital position is expected to offset the pressure on revenues to some extent. Further, the company’s efficient capital deployment activities in the form of shares repurchase, regular payouts and dividend hikes seem impressive.
However, regulatory issues, deteriorating credit metrics and rising expenses remain major concerns.
COMERICA INC Price, Consensus and EPS Surprise
COMERICA INC Price, Consensus and EPS Surprise | COMERICA INC Quote
Currently, Comerica carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Banking major – JPMorgan Chase & Co. (JPM - Free Report) – reported second-quarter 2016 earnings of $1.55 per share, outpacing the Zacks Consensus Estimate of $1.43, primarily driven by improved fixed income and equity trading revenues, and rise in mortgage banking fees. Further, higher net interest income, perhaps attributable to the rise in loan demand and favorable impact from the Fed’s Dec rate hike supported top line.
Wells Fargo & Company’s (WFC - Free Report) second-quarter 2016 earnings recorded a negative surprise of about 1%. Earnings of $1.01 per share lagged the Zacks Consensus Estimate by a penny. Moreover, it compared unfavorably with the prior-year quarter’s earnings of $1.03 per share.
A fall in operating expenses drove Citigroup Inc. (C - Free Report) to deliver a positive earnings surprise of nearly 15% in second-quarter 2016. The company’s earnings from continuing operations for the quarter surpassed the Zacks Consensus Estimate. However, earnings declined 17% on a year-over-year basis.
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