DBRS Comments on Q2 Earnings of Comerica Inc. – Senior at “A” Unchanged

DBRS has today commented on the Q2 2009 earnings of Comerica Inc. (Comerica or the Company). Comerica reported net income of $18 million in the quarter before TARP-related dividends, up from $9 million in the first quarter. After paying $34 million in preferred dividends to the U.S. Treasury, the Company reported a net loss available to common stockholders of $16 million. Elevated credit costs, primarily related to residential real estate development, continued to weigh on results. Revenue and core expense trends were reasonable but Comerica generated a pre-tax loss in the quarter. A methodology change related to federal tax accounting led to a $58 million benefit in the tax line, driving the after tax income. DBRS believes that the Company’s franchise strengths, evidenced by core deposit growth in the quarter and sound credit quality in most loan portfolios, remain intact. As a result, Comerica’s ratings – “A” for Senior obligations and Negative trend – remain unaffected. That being said, DBRS noted that this is the first quarter Comerica’s provision exceeded net income before provision and taxes (IBPT) which could become a rating trigger if sustained.

The Negative Trend on Comerica’s ratings assigned in March 2009 was precipitated by the combination of weaker revenue generation, higher provisions and expense pressures. 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. DBRS commented that acceleration in credit costs beyond a level that can be absorbed by IBPT and/or a significant revenue decline could result in negative rating actions. Well-contained credit costs and revenue stabilization could restore the trend to Stable.

Second quarter net charge-offs (NCOs) of $248 million exceeded prior guidance and were up $91 million from Q1 2009. About 44% of Q2 2009 NCOs were related to residential real estate development (a subset of the Company’s $6.2 billion non-owner occupied CRE book) with condo developments in Florida and loans to national developers being key drivers of losses in the quarter. Some weakness was also evident in Comerica’s Midwest market where NCOs increased $45 million from the first quarter to $99 million in Q2 2009. DBRS notes that exposure to the automotive industry, including Comerica’s auto supplier portfolio and dealer loans, continued to perform relatively well. The Company charged off a $21 million leveraged lease relationship with GM in the quarter and has no more direct exposure to GM or Chrysler. Comerica’s second quarter provision of $312 million was 52% higher than Q1 2009 and added $64 million to reserves. The LLR/loans ratio was 1.89% as of June 30 compared to 1.68% at the end of the first quarter.

Nonperforming assets (NPAs) increased to $1.2 billion (264 bps of loans and foreclosed property) at June 30 from $1.1 billion (220 bps of loans and foreclosed property) at March 31. Commercial real estate comprised the largest portion of non-accrual loans at about 56%. Reserves/NPAs declined to 78% from 83% last quarter, however, DBRS notes that Comerica’s NPAs have been marked down 39% as of June 30, 2009, a haircut that compares favorably to peers.

In line with expectations, Comerica reported that its NIM expanded 20 bps to 2.73% for the second quarter thanks to wider loan spreads, lower deposit rates and the roll-off of some brokered CDs. Average core deposits (excluding FSD deposits) reflected solid growth, up $1.1 billion in Q2 2009 to $33.1 billion. Deposits grew across regions and by customer type and most of the growth in the quarter, about $1 billion, was in noninterest-bearing deposits. With a wider NIM, the Company’s net interest income grew 5% from Q1 2009 to $402 million despite a $1.9 billion decline in average loans which reflected reduced demand in the current economic environment.

Noninterest income grew 34% or $75 million from Q1 2009 to $298 million for Q2 2009 as the Company took gains of $109 million (pre-tax) on its agency MBS portfolio. This decision reflected the attractive pricing on the securities in the current rate environment, the high quality of the portfolio as well as the Company’s intention to reduce securities to about 10% of average assets. Average available for sale investment securities were 13.6% of average assets in Q2 2009 and Comerica noted the agency MBS portfolio had unrealized gains of $142 million (pre-tax) as of June 30. Operating expenses, excluding the $29 million FDIC special assessment charge, remained about 10% below the 2008 quarterly run rate and workforce has been reduced by about 10% since June 30, 2008.

The Company’s liquidity and capital positions remain sound. A stable core deposit base (including FSD) combined with a high quality securities portfolio underpin Comerica’s satisfactory liquidity profile. The Company has prudently retained liquidity, to the detriment of its NIM, with approximately $1.8 billion on deposit at the Fed. While wholesale funding reliance has historically been elevated relative to peers, DBRS views positively Comerica’s intention to reduce wholesale funding as the balance sheet shrinks in the current environment. Capital remains adequate for the Company’s risk profile. Comerica’s tangible common equity ratio was 7.55% at June 30 up 28 bps from March 31 and higher than that of similarly-rated peers. The estimated Tier 1 common and Tier 1 ratios were 7.65% and 11.6%, respectively at the end of the second quarter.

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.