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Comerica (CMA) Q1 Earnings Improve Y/Y, Expenses Escalate

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Comerica (CMA - Free Report) reported adjusted earnings per share of $1.54 in first-quarter 2018, up from the prior-year quarter adjusted figure of $1.02 on high interest income. Including certain non-recurring items, earnings came in at $1.59. The Zacks Consensus Estimate was $1.49.

Higher revenues and improved credit metrics were recorded. Moreover, rise in loans was another tailwind. However, lower deposits and rise in expenses were undermining factors.

Shares of Comerica edged down more than 1% in the pre-market session, indicating that investors have been bearish on the results. The price reaction during the full-trading session will give a fair idea about the extent of disappointment among investors.

Adjusted net income came in at $271 million, up 46.5% year over year. This figure excludes a restructuring charge of $12 million and other non-recurring items.

Segment wise, on a year-over-year basis, net income increased 11.9% at Business Bank, 81.8% at Retail Bank and 34.8% at Wealth Management. On the other hand, Finance segment recorded net income as compared with the loss in the prior-year quarter.

Revenues Up, Expenses Escalate

Comerica’s first-quarter net revenues were $793 million, up 10.9% year over year. However, the figure lagged the Zacks Consensus Estimate of $811.6 million. Results include the impact of adopting new accounting standard.

Net interest income increased 16.8% on a year-over-year basis to $549 million. Moreover, net interest margin expanded 56 basis points (bps) to 3.41%.

Total adjusted non-interest income came in at $244 million, slightly down on a year-over-year basis. Lower card fees, commercial lending fees, bank-owned life insurance and other non-interest income were mostly offset by increased fiduciary income and brokerage fees.

Further, adjusted non-interest expenses totaled $430 million, up 2.4% year over year. The rise was chiefly due to higher salaries and benefits expense, and restructuring charges.

Notably, Growth in Efficiency and Revenue (GEAR Up) Initiative Implementation resulted in increased pre-tax income of 25%.

Solid Balance Sheet

As of Mar 31, 2018, total assets and common shareholders' equity were $72.3 billion and $8 billion, respectively, compared with $73 billion and $7.9 billion as of Mar 31, 2017.

Total loans inched up 1.9% year over year to $49.2 billion. However, total deposits decreased 2.2% from the prior-year quarter to $57.6 billion.

Credit Quality Improved

Total non-performing assets plunged 37.8% year over year to $339 million. Also, allowance for loan losses was $738 million, down 2.1% from the prior-year period. Additionally, the allowance for loan losses to total loans ratio was 1.42% as of Mar 31, 2018, down from 1.47% as of Mar 31, 2017.

Furthermore, net loan charge-offs descended 15.2% on a year-over-year basis to $28 million. In addition, provision for credit losses declined 25% year over year to $12 million.

Strong Capital Position

As of Mar 31, 2018, the company's tangible common equity ratio was 10.29%, up 19 bps year over year. Common equity Tier 1 capital ratio was 11.96%, up from 11.55% reported in the year-ago quarter. Total risk-based capital ratio was 14.10%, up from 13.72% 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 1.6 million shares under its existing equity repurchase program. This, combined with dividends, resulted in a total payout of $201 million to shareholders.

Impressive Outlook for 2018

Comerica guided for 2018 as compared with 2017, taking into consideration the current economic and rate environment, along with the GEAR Up initiative, resulting in $270 million of benefits.

The company anticipates higher net interest income, including the benefit of short-term rate increase and loan growth. Notably, full-year benefits from 2017 and first-quarter 2018 rate increases of $205-$215 million are expected.

Non-interest income is estimated to be higher, reflecting an increase of 4% (excluding accounting-changes impact of $120 million and deferred compensation of $8 million). The rise is expected on the GEAR Up opportunities driving growth in treasury management and card fees, along with fiduciary and brokerage services.

Non-interest expenses are predicted to be higher by 1%, excluding an estimated $25-$45 million restructuring expense and accounting changes impact of $120 million. Notably, additional $50 million in GEAR Up savings is expected.

Restructuring charges of $47-$57 million is anticipated. Persistent higher technology expenditures and typical inflationary pressures are likely to occur, while efficiency ratio is projected to improve.

Provision for credit losses is likely to be 15-25 bps and net charge-offs are expected to be low.

Income tax expense is anticipated to approximate 23% of pre-tax income, excluding further tax impact from employee stock transactions.

Comerica expects average loan growth to be in line with Gross Domestic Product growth. The outlook reflects rise across most lines of business, and stability in energy and corporate banking portfolios.

Q2 2018 Outlook

Average loans are expected to be up sequentially due to seasonality, particularly in Mortgage Banker Finance.

Net interest income is likely to escalate on full-quarter impact from first-quarter 2018 rate increase and the return of loan growth.

Provision for credit losses are expected to be higher.

Non-interest expenses are predicted to decrease moderately, mainly due to lower compensation expense.

Our Viewpoint

The consistent improvement in the loan portfolio is projected to offset the pressure on revenues to some extent. Further, the company will benefit from its ongoing strategic initiatives. Its robust capital position supports steady capital-deployment activities through share repurchases and dividend hikes which seem impressive. Though regulatory issues and rise in expenses remain major concerns, rising rates remained a tailwind.

Comerica Incorporated Price, Consensus and EPS Surprise

Comerica Incorporated Price, Consensus and EPS Surprise | Comerica Incorporated Quote

Currently, Comerica carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Wall Street Biggies

Driven by top-line strength, Citigroup (C - Free Report) delivered a positive earnings surprise of 4.3% in first-quarter 2018. Earnings per share of $1.68 for the quarter easily outpaced the Zacks Consensus Estimate of $1.61. Also, earnings compared favorably with the year-ago figure of $1.35 per share.

Overall high revenues were reflected, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. However, fixed income markets revenue disappointed. Moreover, expenses escalated on ongoing investments.

Wells Fargo (WFC - Free Report) recorded positive earnings surprise of 4.7% in first-quarter 2018. Earnings of $1.12 per share surpassed the Zacks Consensus Estimate of $1.07. Moreover, results improved from the prior-year quarter earnings of $1.03.

Notably, results are preliminary which might be impacted on resolution of matters with Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) related to the bank’s compliance risk-management program with a charge of $1 billion in civil money penalties.

Lower provisions and higher interest income aided results. However, elevated interest expense and reduced non-interest income with lower mortgage revenues were the undermining factors. Moreover, expenses soared. Further, reduction in loans and deposits acted as headwinds for the quarter.

Among other Wall Street giants, U.S. Bancorp (USB - Free Report) is scheduled to report first-quarter 2018 earnings on Apr 18.

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