Zacks_Analysts' Blog : Comerica Surpasses Zacks Estimate - Analyst Blog

Comerica Incorporated (CMA) reported fourth-quarter 2011 operating earnings of 60 cents per share, comfortably beating the Zacks Consensus Estimate of 46 cents.

However, the reported quarter earnings included $23 million after-tax or 12 cents per share of merger and restructuring charges related to the acquisition of Sterling Bancshares Inc. The company completed the purchase of Sterling in the prior quarter and incurred charges of $21 million after-tax or 11 cents per share in that quarter.

After considering this expense, net income attributable to common shares came in at $95 million or 48 cents per share in the reported quarter compared with $97 million or 51 cents per share in the prior quarter and $95 million or 53 cents per share in the prior-year quarter.

Comerica’s results reflected a growth in net interest income and a decrease in loan loss provisions driven by an improvement in credit quality. However, a fall in non-interest income and a rise in expenses were on the downside.

For full year 2011, Comerica reported net income attributable to common shares of $389 million or $2.09 per share, in line with the Zacks Consensus Estimate and significantly up from $153 million or 78 cents per share in 2010.

Comerica’s total revenue in the quarter was $663 million, nearly flat both sequentially and year over year. Total revenue also surpassed the Zacks Consensus Estimate of $619 million.

For full year 2011, Comerica reported total revenue of $2.6 billion, up 1.6% year-over-year and well above the Zacks Consensus Estimate of $2.4 billion.

Quarter in Detail

Comerica’s net interest income surged 5% from the prior quarter and 10% year over year to $444 million in the reported quarter. The rise was mainly due to increase in average earning assets. Net interest margin (NIM) improved 1 basis point (bp) sequentially but declined 10 bps year-over-year to 3.19% in the quarter.

In the reported quarter, Comerica’s non-interest income was $182 million, down 9% sequentially and 15% year-over-year. The sequential decrease was primarily due to net securities losses and card fees, as a result of the implementation of regulatory limits on debit card transaction processing fees, partially offset by an increase in deferred compensation asset returns.

Non-interest expenses during the reported quarter totaled $478 million, up 4% sequentially and 10% year over year. The sequential increase was primarily driven by increases in deferred compensation plan costs, severance and related expenses, merger and restructuring charges as well as an additional month of Sterling expenses.

Credit Quality

Comerica recorded significant improvement in credit quality during the reported quarter. Provision for loan losses fell 50% sequentially and a whopping 67% year over year to $19 million during the quarter.

Net credit-related charge-offs decreased $17 million to $60 million in the reported quarter, reflecting higher recoveries. The decrease was mainly aided by a decline in Small Business Banking, Middle Market and Commercial Real Estate, partially offset by an increase in Technology and Life Sciences line.

Comerica’s nonperforming assets were $981 million, down from $1.05 billion in the prior quarter and $1.23 billion in the year-ago quarter. It was for the first time since the fourth quarter of 2008, that nonperforming assets came below $1 billion and this is encouraging.

Balance Sheet and Capital Ratios

Period-end total loans increased 4% sequentially, primarily reflecting an increase in commercial loans, partially offset by a decrease in commercial real estate loans.

Period-end deposits increased 1% sequentially, primarily reflecting an increase in non-interest-bearing deposits, partially offset by decreases in savings and customer certificates of deposit.

As of December 31, 2011, total assets and common shareholders’ equity were $61.0 billion and $6.9 billion, respectively, compared with $60.9 billion and $7.0 billion, respectively, as of September 30, 2011.

As of December 31, 2011, Comerica’s tangible common equity ratio was 10.27%, down 16 bps sequentially.  The estimated Tier 1 common capital ratio of 10.31% was down 26 bps from September 30, 2011.

Capital Deployment Update

Comerica bought back 1.6 million and 4.1 million shares of common stock in the open market in the fourth quarter and full-year 2011, respectively, under the share repurchase program.

Outlook 2012

Given the current economic environment, Comerica’s outlook for full year 2012 is a modest one. Compared to the full year 2011 level, management expects a moderate increase in net interest income supported by modest growth in average loans.

Non-interest income as well as non-interest expense is anticipated to remain stable. While net credit-related charge-offs is likely to decline, provision for credit losses are anticipated to remain relatively stable.

Peer Performance

One of the closest peers of Comerica, M&T Bank Corporation’s (MTB) fourth quarter 2011 operating earnings of $1.20 per share were significantly below the Zacks Consensus Estimate of $1.46. Earnings also lagged earnings of $1.53 per share in the prior quarter and $1.52 in the year-ago period.

Quarterly results were aided by an increase in net interest income and non-interest income coupled with lower provision for credit losses. However, an increase in expenses related to the Wilmington Trust acquisition was on the downside.

The other company in its peer group, KeyCorp (KEY) will announce its fourth quarter 2011 earnings on Tuesday, January 24, 2012.

Our Take

Comerica’s strategic expansion efforts augur well. The acquisition of Sterling will enhance its growth in Texas. The company is focused on opportunities to accelerate growth, particularly in the urban markets of California and Texas.

We expect its organic growth to pick up with a recovery expected in the upcoming quarters. Continuous geographic diversification beyond Comerica’s traditional and slower-growing Midwest markets could drive growth over the next cycle.

Capital deployment efforts also inspire investors’ confidence in the stock. The company is targeting a first quarter 2012 total payout ratio of up to 50% of net income through the share repurchase program and dividends.

Yet, its significant exposure to riskier areas such as commercial real estate markets, unsettled economic environment and regulatory headwinds are the downsides.

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