30/09/2020

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Comerica (CMA) Q2 Earnings Miss Estimates, Provisions Escalate

Comerica CMA has reported second-quarter 2020 earnings per share of 80 cents, significantly surpassing the...

Comerica CMA has reported second-quarter 2020 earnings per share of 80 cents, significantly surpassing the Zacks Consensus Estimate of 21 cents. Earnings, however, came in lower than the prior-year quarter figure of $1.94.

Lower revenues, aided by reduction in net interest as well as non-interest income, were recorded. Moreover, rise in expenses and provisions were major drags. Nevertheless, rise in loans and deposits acted as tailwinds.

Net income came in at $113 million in the quarter, significantly down 62.1% year over year.

Furthermore, segment wise, on a year-over-year basis, net income decreased 26.5% at Commercial Bank and 64.1% at Wealth Management. The Retail and Finance segments reported net loss.

Revenues Down, Expenses Up

Comerica’s second-quarter net revenues were $718 million, down 15.8% year over year. However, the revenue figure surpassed the Zacks Consensus Estimate of $692 million.

Net interest income slipped 21.9% on a year-over-year basis to $471 million in the quarter, on lower short-term rates, partially negated by elevated loan volumes. In addition, net interest margin contracted 116 basis points (bps) to 2.50%.    

Total non-interest income came in at $247 million, down 1.2% on a year-over-year basis. Lower service charges on deposit accounts, commercial lending fees and other non-interest income mainly impacted the results, partly mitigated by increase in securities trading income, customer derivative income and card fees.

Non-interest expenses totaled $440 million, up 3.8% year over year. The upswing resulted chiefly from higher salaries and benefits expense, software expense and other non-interest expenses.

Efficiency ratio was 61.14% compared with the prior-year quarter’s 49.65%. A rise in ratio indicates a fall in profitability.

Solid Balance Sheet

As of Jun 30, 2020, total assets and common shareholders’ equity were $81.6 billion and $7.4 billion, respectively, compared with $70.5 billion and $7.4 billion as of Jun 30, 2019.

Total loans climbed 8% on a sequential basis to $53.5 billion. Also, total deposits jumped 13% from the prior quarter to $64.3 billion.

Credit Quality: A Concern

Credit metrics deteriorated during the June-end quarter. Total non-performing assets increased 21% year over year to $282 million. Also, allowance for loan losses was $1 billion, up 53.3% from the prior-year period. Additionally, the allowance for loan losses to total loans ratio was 1.88% as of Jun 30, 2020, up from 1.27% as of Jun 30, 2019.

Moreover, provision for credit losses came in at $138 million, more than doubled from the prior-year quarter, reflecting the expected impact of the COVID-19 pandemic and continued pressure on the Energy sector. Further, net loan charge-offs surged 51.5% on a year-over-year basis to $50 million.

Strong Capital Position

As of Jun 30, 2020, the company’s tangible common equity ratio was 8.08%, down 122 bps year over year. Common equity Tier 1 capital ratio was 9.97%, down from the 10.18% reported in the year-ago quarter. Total capital ratio was 12.93%, up from the prior-year quarter’s 12.17%.

Q3 Outlook Compared With Q2

Comerica has guided for third-quarter 2020, taking into consideration the recessionary conditions.

Comerica expects average loans to decline. The outlook reflects decline in Mortgage Banker Finance, Large Corporate and National Dealer Services, partly offset by lending to small businesses with a full-quarter benefit of PPP. Furthermore, average deposits are expected to be relatively stable on customers’ utilization of economic stimulus proceeds.

The company projects lower net interest income, unusually impacted by lower interest rates (assuming 1-month LIBOR of 17 basis points and deposit cost of 20 basis points) and reduced loan balances, partly offset by reduced wholesale debt and one additional day. Notably, management expects $10-15 million reduction sequentially in the September-end quarter.

Non-interest income will likely decline on lower card fees related to transaction activity and reduced market-based investment banking and derivative fees, partially mitigated by elevated service charges on deposit accounts due to increased activity. Remarkably, higher securities trading income and deferred compensation levels recorded in the second quarter are not expected in the third.

Non-interest expenses are estimated to flare up, resulting from higher costs related to technology and occupancy projects, as well as higher charitable contributions and seasonal impacts of marketing and staff insurance expenses. This will be mostly negated by continued expense discipline and reduction in COVID-19-related costs.

Provisions for credit losses are expected to be reflective of economic environment, including the impact of the duration and sternness of the pandemic.

Our Viewpoint

Comerica will benefit from its ongoing strategic initiatives. Its robust capital position supports steady capital-deployment activities through share repurchases and dividend hikes, which seem impressive. Nonetheless, rise in expenses and provisions are concerns. Apart from this, restricted top-line expansion, eroded by a lower margin and fee income, is a concern.
 

Comerica Incorporated Price, Consensus and EPS Surprise

Comerica Incorporated Price, Consensus and EPS Surprise

Comerica Incorporated price-consensus-eps-surprise-chart | Comerica Incorporated Quote

Currently, Comerica carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Mega Banks

Citigroup C delivered an earnings surprise of 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.

Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, and prime finance and securities services revenues declined, fixed income revenues were on an upswing reflecting strength in rates and currencies, spread products and commodities. Moreover, investment banking revenues increased on solid underwriting business, partly muted by lower advisory business. Additionally, fall in expenses was on the upside. However, elevated cost of credit due to the pandemic is a major drag.

A significant improvement in trading and mortgage banking businesses drove JPMorgan’s JPM second-quarter earnings of $1.38 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.34. The results included provision builds due to deterioration in the macro-economic backdrop, bridge book markups and gains related to funding spread tightening on derivatives. Excluding these, earnings per share amounted to $3.27.

Wells Fargo WFC reported second-quarter 2020 loss per share of 66 cents, which resulted from a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents. Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.

Provisions also soared on the coronavirus crisis during the reported quarter. Furthermore, rise in non-interest expenses and a decline in loan balance acted as headwinds.

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