A month has gone by since the last earnings report for Comerica Incorporated (CMA - Free Report) . Shares have added about 6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is CMA due for a pullback? 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 Q1 Earnings Improve Y/Y, Expenses Escalate
Comerica reported adjusted earnings per share of $1.54 in first-quarter 2018, up from the prior-year quarter’s 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 the undermining factors.
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, the Finance segment recorded net income against loss incurred 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, 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 decreased 15.2% on a year-over-year basis to $28 million. In addition, provision for credit losses declined 25% 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 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, an additional $50 million in GEAR Up savings is expected.
Restructuring charges of $47-$57 million are 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 expenses are 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 expenses.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to four lower.
At this time, CMA has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks''style scores indicate that the company's stock is suitable for value and growth investors.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise CMA has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.