DBRS Comments on Q4 2008 Earnings of Comerica Incororated – Senior at “A” Unchanged

DBRS has today commented on the Q4 2008 earnings of Comerica Incorporated (Comerica or the Company). Comerica reported net income of $20 million for the quarter ($3 million after paying out preferred dividends related to perpetual preferred shares issued to the U.S. Treasury as part of the Capital Purchase Program), down from $28 million in the prior quarter and $119 million in Q4 2007. The quarter’s earnings included a $192 million provision for loan losses, compared with $165 million for Q3 2008 and $108 million for Q4 2007. Severance-related expenses of $29 million in the quarter also affected results. The lower earnings notwithstanding, Comerica’s franchise strengths remain in tact and credit fundamentals remain within tolerance in a difficult operating environment and therefore its ratings – “A” for senior obligations – and Stable trend remain unaffected.

As expected, non-performing assets (NPAs) increased to 1.94% of total loans and foreclosed property in Q4 2008 from 1.71% in the prior quarter and 0.83% in Q4 2007, primarily due to higher delinquencies in the Company’s California residential real estate development loan portfolio. Commercial real estate comprised the largest portion of non-accrual loans at 63%. By geography, almost half of the non-accruals are in the Western market. NPAs in other sectors of its loan portfolio, including the consumer sector, continue to perform relatively well. The Company continues to reduce its auto, commercial and residential real estate construction exposure.

Although non-performing and past-due loan quality trends were negative over the period, net charge-offs (NCOs) were relatively stable at 1.04% of loans in Q4 2008, up modestly from 0.90% of loans in the prior quarter and 0.50% a year earlier. Nearly half of the charge-offs were in the commercial real estate line of business, primarily related to the California residential real estate development sector. Provision for loan losses was $192 million in Q4 2008 compared with $165 million in Q3 2008 and $108 million in Q4 2007. The allowance-to-total loans increased in Q4 2008 to 1.52% compared with 1.38% in the prior quarter as the Company continues to provide for loan losses in excess of charge-offs. DBRS believes that further erosion in Comerica’s asset quality and currently stable provision levels are likely to continue as the Company’s predominantly business-focused loan portfolio is affected by the turmoil in the housing sector and rising unemployment in the recessionary economy. In DBRS’s opinion, Comerica can likely absorb the incremental loan losses from earnings without impairing its capital or franchise strengths.

Net interest income in the quarter declined 8% from Q3 2008 due to margin compression, reflecting the negative impact of three Federal Reserve rate cuts totaling 175 basis points (bps) in a challenging deposit pricing environment, somewhat offset by improved loan spreads. Non-interest income was $174 million in the quarter, 28% less than in the prior quarter, reflecting decreases in deferred compensation asset returns and net loss from principal investing and warrants. Non-interest expenses decreased $103 million from Q3 2008, mainly due to the third quarter’s $96 million charge related to the purchase of auction-rate securities and an $11 million decline in the provision for credit losses on lending-related commitments. Core expense growth was well controlled as the Company reduced its headcount by 5% from last year and expects an additional 5% headcount reduction to be completed by the end of Q1 2009. Annualized salary expense savings of about $35 million are expected to be realized from this initiative. The Company is also slowing its banking center expansion and now expects to open significantly fewer banking centers in 2009 than the 28 it opened in 2008.

The Company’s average loans (excluding Financial Services Division (FSD) loans) declined 1%, with decreases of 7% in the Western market and 2% in the Midwest market offset by growth of 15% in the Texas market. The declines reflected reduced demand from customers in rapidly deteriorating economic environments. Average loans, excluding FSD loans, increased 3% compared with Q4 2007. Compared with Q3 2008, average non-interest bearing deposits (excluding FSD deposits) increased 7%.

The Company’s liquidity and capital positions remain sound and generally in line with those banks in its rating group. Core deposits (including FSD deposits) accounting for approximately 63% of loans, combined with a high-quality securities portfolio and ample unused borrowing capacity (which now includes multi-billion-dollar borrowing capacity with the Federal Home Loan Bank (FHLB) of Dallas), underpin Comerica’s satisfactory liquidity profile. Capital remains adequate for the Company’s risk profile. Comerica has taken part in the U.S. Treasury’s Capital Purchase Program, issuing $2.25 billion in preferred shares. This action raised the Company’s Tier 1 capital ratio by 300 bps to 10.67%. Additionally, the Company cut its dividend by 50%, which will preserve about $200 million of capital per year. DBRS views this action as prudent given the unprecedented stress in the capital markets, which has reduced financial flexibility for financial institutions seeking capital.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.