DBRS Comments on Q1 Earnings of Comerica Inc. – Senior at “A” Unchanged

DBRS has today commented on the Q1 2009 earnings of Comerica Inc. (Comerica or the Company). Comerica reported net income of $9 million in the quarter ($24 million loss after paying out $33 million in preferred dividends to the U.S. Treasury related to the TARP program), down from $20 million in the prior quarter and $109 million in Q1 2008. The quarter’s earnings featured a $203 million provision for loan losses, compared with $192 million in Q4 2008 and $159 million in Q1 2008. The Company also continued with its efficiency initiative shedding 5% of staff in Q1 2009, bringing it to the lowest staffing level in more than a decade. The lower earnings notwithstanding, Comerica’s franchise strengths remain intact and credit fundamentals remain within tolerance in a difficult operating environment and therefore its ratings – “A” for Senior obligations and Negative trend - remain unaffected.

The combination of weaker revenue generation, higher provisions and expense pressures precipitated the Negative Trend assigned on March 31. A material weakening of Comerica’s risk profile with credit costs encroaching income before provisions and taxes in the next 12 months and/or significant revenue decline could result in negative rating actions. Well-contained credit costs and revenue stabilization could restore the trend to Stable.

Per DBRS expectations, net interest income declined $47 million or 11% compared to Q4 2008 and $92 million or 19% compared to Q1 2008 due to declining loan volumes and margin compression. The net interest margin declined 29 basis points (bps) compared to Q4 2008, and 69 bps compared to Q1 2008 as a result of lower loan yields, a limited opportunity to reduce deposit rates in the face of strong competition, and the decreased contribution of noninterest-bearing deposits in a significantly lower rate environment, somewhat offset by increasing loan spreads. The Company expects modest margin expansion for the remainder of the year due to continued loan spread expansion as well as higher-cost time deposits and debt rolling off the balance sheet in coming quarters.

Noninterest income was $223 million in Q1 2009, compared to $174 million in Q4 2008 and $237 million in Q1 2008. Compared to the prior quarter, noninterest income in Q1 2009 included a $24 million pre-tax gain on the termination of certain structured lease transactions and $13 million of net securities gains, which included gains of $8 million from sales of mortgage-backed securities and $5 million from redemptions of auction-rate securities. DBRS believes that these relatively benign results reflect the conservative investment strategy employed by the Company.

Comerica continued implementing its efficiency initiative, cutting an additional 5% of overhead in the quarter which DBRS believes is prudent given the current operating environment. The Company is targeting $35 million in cost savings to be realized on annual basis from this initiative. In addition to implementing workforce reductions, Comerica is instituting a salary freeze for the top 20% of its workforce, slowing banking center expansion, and consolidating banking centers.

Loan volumes (averages excluding Financial Services Division) were down by $1.7 billion in the quarter. National Dealer Services average loans declined $461 million while middle market average loans fell in all geographic markets. The declines reflected reduced demand from customers in a deteriorating economic environment as well as loan paydowns. Average core deposits (excluding the Financial Services Division) increased $1 billion or 3% in the quarter reflecting an $840 million increase in noninterest-bearing deposits.

Credit quality metrics continued to weaken during the quarter. Nonperforming assets increased to $1.07 billion (220 bps of loans and foreclosed property) at March 31, 2009 from $983 million (194 bps of loans and foreclosed property) at year-end 2008. Delinquencies (90 days past due) rose sharply to $207 million at Q1 2009 from $125 million in the prior quarter, suggesting that credit quality is still deteriorating. Commercial real estate (including commercial construction) comprised the largest portion of non-accrual loans at about 70%. By geography, almost 40% of the non-accruals are in the Western market, with a quarter of nonaccruals related to the western market local residential real estate developer portfolio. NPAs in other sectors of Comerica’s 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.

Net charge-offs totaled $157 million or 1.26% of average total loans. 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. The allowance to total loans increased in Q1 2009 to 1.68% compared to 1.52% 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 impacted by ripple effects from the housing sector and rising unemployment in a recessionary economy.

The Company’s liquidity and capital positions remain sound, and generally in line with those banks in its rating group. Sufficient core deposits (including FSD) combined with a high quality securities portfolio and ample unused borrowing capacity (that includes a multi-billion borrowing capacity with the Dallas FHLB) underpin Comerica’s satisfactory liquidity profile. Capital remains adequate for the Company’s risk profile. Comerica’s tangible common equity ratio was 7.27% at March 31, 2009. The estimated Tier 1 common, Tier 1, and total risk based capital ratios were 7.33%, 11.08%, and 15.4%, respectively at March 31, 2009. To preserve capital, the Company reduced its quarterly cash dividend rate to $0.05 per common share in Q1 2009, from $0.33 per common share in Q4 2008. This enables the Company to retain approximately $170 million in additional capital per annum.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.