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Comerica Beats Estimates

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Comerica Inc. (CMA - Free Report) reported third quarter 2012 adjusted earnings of 69 cents per share, beating the Zacks Consensus Estimate of 65 cents. However, results were below the earnings per share of 75 cents reported in the prior quarter.

Comerica’s results reflected growth in its average loans, aided by higher average commercial loans. Average deposits also advanced in the quarter. Further, a stable credit quality continued to be a positive. However, a decline in the top line and increasing expenses were the negatives.

Considering restructuring costs related to the acquisition of Sterling Bancshares Inc., the company reported net income of $117.0 million or 61 cents per share in the quarter under review. Also, taking into account the impact of the comparable items, earnings came in at $144.0 million or 73 cents per share in the prior quarter.

Comerica’s total revenue of $657 million in the reported quarter declined 3.5% sequentially. However, it surpassed the Zacks Consensus Estimate of $632 million.

Quarter in Detail

Comerica’s net interest income inched down 1.8% sequentially to $427 million.  The decline was mainly due to a fall in non-accrual interest received and a leasing residual value adjustment along with the anticipated continued shift in the mix of the loan portfolio, a decrease in the accretion of the purchase discount on the acquired Sterling loan portfolio and lower reinvestment yields on mortgage-backed investment securities. These negatives were partially mitigated by lower funding costs, a hike in loan volumes and an additional day in the third quarter.

Net interest margin fell 14 basis points (bps) sequentially to 2.96%. The sequential decline was mainly due to lower non-accrual interest, the negative leasing residual value adjustment in the reported quarter, lower accretion on the acquired Sterling loan portfolio, continued shift in mix in the loan portfolio, lower reinvestment yields on mortgage-backed securities, and an increase in excess liquidity. These negatives were, however, partially offset by lower funding costs.

Average total loans marginally grew 1.0% sequentially as a result of an increase of 3% in commercial loans, partially offset by a decrease of 3.0% in commercial real estate loans. Average deposits increased 2.0% from the prior quarter, largely attributable to an increase of 7.0% in non-interest bearing deposits.

Comerica’s non-interest income came in at $197 million, down 6.6% sequentially. The sequential decline was mainly due to decreases in certain non-customer driven income segments.

Non-interest expenses totaled $449 million, up 3.7% sequentially. The increase was mainly due to the hike in restructuring costs associated with the Sterling acquisition and salaries expense, partially offset by a decline in legal expenses.

Credit Quality

Credit quality continued to be stable at Comerica. Net credit-related charge-offs declined 4.4% sequentially and 44.2% year over year to $43 million.

Nonperforming assets to total loans and foreclosed property equaled 1.71% in the reported quarter, down from 1.85% in the prior quarter and 2.53% in the year-ago quarter.

Provision for credit losses increased 15.8% sequentially, but declined 37.1% year over year to $22 million. The allowance for loan losses to total loans ratio was 1.46% as of September 30, 2012, down from 1.52% as of June 30, 2012, and 1.86% as of September 30, 2011.

For the rest of the year, the company expects provision and net charge-offs to decline.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of September 30, 2012, total assets and common shareholders' equity were $63.3 billion and $7.1 billion, respectively, up from $62.7 billion and $7.0 billion, respectively, as of June 30, 2012.

As of June 30, 2012, Comerica's tangible common equity ratio was 10.25%, down 2 bps sequentially. Moreover, the estimated Tier 1 common capital ratio moved down 6 bps sequentially to 10.32% as of September 30, 2012.

Capital Deployment Update

Comerica’s capital deployment initiatives, through dividend payment and share buybacks, exhibit its capital strength. During the reported quarter, Comerica had bought back 2.9 million shares for $90 million under its current share repurchase authorization. This, combined with dividend, resulted in a total payout of 89% of net income (excluding the restructuring charge in the third quarter) to shareholders in the third quarter. We expect such activities to further boost to investors’ confidence in the stock.

Outlook 2012

Comerica has provided a detailed outlook for 2012. Given the continuation of the current economic environment, the company’s outlook for full year 2012 is a modest one. Compared to the full year 2011 level, management expects a 4%–5% increase in net interest income, supported by 7%–8% growth in average loans.

Non-interest income is projected to expand 1%–2% while non-interest expenses are anticipated to rise or fall 1%. Net credit-related charge-offs and provision for credit losses are likely to exhibit a declining trend.

Peer Performance

In addition to Comerica, a number of major Wall Street Banks such as JPMorgan Chase & Company (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and Citigroup Inc. (C - Free Report) have reported better-than-expected results in this quarter. We believe this would help to maintain a positive atmosphere in the market.

Our Take

Going forward, we believe Comerica’s continuous geographic diversification beyond its traditional and slower-growing Midwest markets could drive growth over the next cycle. Revenue synergies from the Sterling acquisition should augment its top-line growth. Further, the company’s capital deployment activities augur well for investors.

Yet, the company’s significant exposure to commercial real estate markets, the unsettled economic environment, low interest rate and stringent regulatory issues are our matters of concern.

Comerica currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals we have a Neutral recommendation on the stock.

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