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Comerica (CMA) Q2 Earnings Lag Estimates, Revenues Rise

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Comerica (CMA - Free Report) reported second-quarter 2019 earnings per share of $1.94 that lagged the Zacks Consensus Estimate of $2.01. However, the bottom line was up from the prior-year quarter adjusted figure of $1.87.

Higher revenues, rise in interest and non-interest income, and lower expenses were recorded. Moreover, rise in loans was another tailwind. However, lower deposits and rise in provisions were undermining factors.

Net income for the quarter came in at $298 million, down 8.6% year over year.

Furthermore, segment wise, on a year-over-year basis, net income decreased 12.8% at Business Bank. However, it increased 60% at Retail Bank and 44.4% at Wealth Management. The Finance segment incurred net loss against income recorded in the prior-year quarter.

Revenues Up, Expenses Decline

Comerica’s second-quarter net revenues were $853 million, up 1.8% year over year.
However, the figure lagged the Zacks Consensus Estimate of $857.2 million.

Net interest income increased 2.2% on a year-over-year basis to $603 million. In addition, net interest margin expanded 5 basis points (bps) to 3.67%.

Total non-interest income came in at $250 million, slightly up on a year-over-year basis. Higher card fees and other non-interest income were mostly offset by decrease in mainly service charges on deposit accounts and commercial lending fees.

Further, non-interest expenses totaled $424 million, down 5.4% year over year. The decline resulted from lower salaries and benefits expense, software expense and FDIC insurance expense.

Efficiency ratio was 49.65% compared with 53.24% in the prior-year quarter. A fall in ratio indicates a rise in profitability.

Solid Balance Sheet

As of Jun 30, 2019, total assets and common shareholders' equity were $72.5 billion and $7.3 billion, respectively, compared with $72 billion and $8.1 billion as of Jun 30, 2018.

Total loans were up 3% on a sequential basis to $51.8 billion. However, total deposits decreased 2.7% from the prior quarter to $55.5 billion.

Credit Quality

Total non-performing assets plunged 11.7% year over year to $233 million. Also, allowance for credit losses was $688 million, down 3.2%. Additionally, allowance for loan losses to total loans ratio was 1.27% as of Jun 30, 2019, down from 1.36% as of Jun 30, 2018.

However, net loan charge-offs came in at $33 million against net recoveries of $3 million in year-ago quarter. In addition, provision for credit losses was $44 million against a benefit of $29 million in the prior-year quarter.

Strong Capital Position

As of Jun 30, 2019, the company's tangible common equity ratio was 9.30% compared with 10.42% in prior-year quarter. Common equity Tier 1 capital ratio was 10.19%, down from 11.89%. Total risk-based capital ratio was 12.19%, down from 13.96%.

Capital Deployment Update

Comerica’s capital deployment initiatives highlight its capital strength. During the second quarter, the company repurchased 5.7 million shares for a total cost of $425 million under its existing equity repurchase program. This, combined with dividends, resulted in a total payout of $525 million to shareholders.

Impressive Outlook for 2019

Comerica has guided for full-year 2019, taking into consideration the current economic and rate environment.

It expects average loans to be up 3-4%. The outlook reflects growth across most lines of business. However, deposits are likely to decline 2% coincident with loan growth and customers using cash in their businesses.

The company anticipates 2% higher net interest income, including the benefit of short-term rate increase, growth in average loans and repositioning the securities portfolio. Notably, higher wholesale funding, lower interest recoveries, and change in deposit mix might partially offset the benefit.

Non-interest income is estimated to be 1-2% higher backed by growth in fiduciary income and card fees, partly mitigated by reduced derivative income and service charges on deposit accounts.

Non-interest expenses are predicted to be down 3%, indicating the end of restructuring charges from the GEAR Up initiatives, reduction in FDIC insurance expenses by $16 million from the discontinuance of the surcharge, lower compensation and pension expenses. These are expected to be partly muted by elevated outside processing expenses, in line with improving revenues, technology costs and typical inflationary pressure.

Provision for credit losses is likely to be 15-20 bps and net charge-offs are expected to be low, with persistent solid credit quality.

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

Common equity Tier 1 capital ratio is targeted to be 10% through continued return of excess capital.

Our Viewpoint

Consistent expansion of the company’s margin is likely to drive revenues to some extent. Further, Comerica 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. However, decline in deposits and higher provisions remain concerns.

Comerica Incorporated Price, Consensus and EPS Surprise

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 Banks

First Republic Bank’s (FRC - Free Report) second-quarter 2019 earnings per share of $1.24 lagged the Zacks Consensus Estimate of $1.26. Nevertheless, the bottom line improved 3.3% from the year-ago quarter.

Citigroup (C - Free Report) delivered a positive earnings surprise of 2.8% in second-quarter 2019, backed by expense control. Adjusted earnings per share of $1.83 for the quarter handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 12% year over year.

Modest loan growth and higher mortgage banking fees drove JPMorgan’s (JPM - Free Report) second-quarter 2019 adjusted earnings of $2.59 per share, which outpaced the Zacks Consensus Estimate of $2.50. Results exclude income tax benefits of $768 million or 23 cents per share. Including this, earnings were $2.82 per share.

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