DBRS Comments on Q3 Earnings of Comerica Inc. – Senior at “A” Unchanged; Trend Negative

DBRS has today commented on the Q3 2009 earnings of Comerica Inc. (Comerica or the Company). Before TARP-related dividends, Comerica reported net income of $19 million in the quarter, up $1 million from the second quarter. After paying $34 million in preferred dividends to the U.S. Treasury, the Company reported a net loss available to common stockholders of $15 million. Revenue and core expense trends were similar to the prior quarter as Comerica again posted a modest pre-tax loss (the Company received a $29 million benefit for income taxes in the quarter). Elevated credit costs, still driven by residential real estate development and Midwest middle market lending, continued to weigh on results, though DBRS notes positively that the Company is seeing some stabilization in provisions and losses, albeit at historically high levels. DBRS believes that the Company’s franchise strengths, evidenced by core deposit growth in the quarter and sound credit quality in most loan portfolios coupled with adequate capitalization, remain intact. As a result, Comerica’s ratings – “A” for Senior obligations and Negative trend – remain unaffected. That being said, DBRS noted that for a second consecutive quarter Comerica’s provision exceeded income before provision and taxes (IBPT), by a narrow $10 million this quarter, which could become a rating trigger if it widens and is 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 is possible as the Company’s predominantly business-focused loan portfolio is impacted by ripple effects from high unemployment, the still-unsettled housing sector and a troubled economy. As a result, provision levels may persist at elevated levels, which cannot be fully absorbed by current IBPT. DBRS commented that acceleration in credit costs 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.

Credit costs in the third quarter were in-line with Comerica’s expectations as net charge-offs (NCOs) of $239 million declined by $9 million from Q2 2009. About 34% of Q3 2009 NCOs were related to residential real estate development and the Company reported continued weakness in its Midwest middle market lending business. For the Midwest region as a whole, NCOs were $102 million for Q3 2009. DBRS notes that exposure to the automotive industry, including Comerica’s auto supplier portfolio and dealer loans, continued to perform relatively well. Comerica’s third quarter provision of $311 million added $72 million to reserves and the loan loss reserve/loans ratio was up 30 basis points from June 30, 2009 to 2.19% at quarter end.

Nonperforming assets (NPAs) of $1.3 billion increased 6% from June 30, 2009, a slower rate of growth than seen in prior periods. Real estate construction continues to comprise the largest portion of non-accrual loans at about 46%. Loan loss reserves covered nonperforming loans (NPLs) 0.80x compared to 0.78x last quarter, and DBRS notes that Comerica’s NPLs have been marked down 41% as of September 30, 2009, a haircut that compares favorably to peers. Loans 90+ days past due and still accruing declined more than 20% from the end of Q2 2009 to $161 million.

Revenue and balance sheet trends were similar to Q2 2009. Average loans declined $2.9 billion, reflecting still-subdued loan demand, consistent with this stage of the cycle. Deposits posted solid growth again this quarter as average core deposits (ex-FSD) were up $1.1 billion to $34.2 billion. Net interest income declined 4% to $385 million as Comerica’s sizable excess liquidity position, which averaged $3.5 billion for Q3 2009 compared to $1.9 billion (average) in Q2 2009, contributed, amongst other factors, to a 5 basis point contraction in net interest margin to 2.68%. In the fourth quarter, Comerica intends to use some of its excess liquidity to repay maturing high-rate CDs which should benefit the margin.

Noninterest income grew $17 million from Q2 2009 to $315 million for Q3 2009. For a second consecutive quarter Comerica took advantage of attractive pricing on agency MBS, realizing gains of $102 million (pre-tax) in this portfolio in Q3 2009 (vs. $109 million in Q2 2009). Additional MBS gains on this scale are not expected going forward however. Other fee revenue sources, notably service charges on deposits and commercial lending fees, increased in the third quarter. Quarterly operating expenses of $399 million declined $1 million from the prior quarter, excluding the second quarter’s $29 million FDIC special assessment charge. Since September 30, 2008 headcount has been reduced by about 1,000 and through the first nine months of 2009 salary and employee benefits are down 8.5% compared to the prior year, as the Company focuses on controlling costs.

Comerica’s capital remains adequate for its risk profile. The Company’s tangible common equity ratio was 7.96% at September 30, 2009, up 41 bps from June 30, 2009 and higher than that of similarly-rated peers. The estimated Tier 1 common and Tier 1 ratios were 8.02% and 12.18%, respectively at the end of the third quarter.

Note:
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 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.