Comerica (CMA) Q4 Earnings Beat Estimates, Revenues Down Y/Y

Comerica CMA has reported positive earnings surprise of 6.3% in fourth-quarter 2019 on high interest income. Earnings per share of $1.85 surpassed the Zacks Consensus Estimate of $1.74. Earnings, however, came in lower than the prior-year quarter figure of $1.95.

Higher non-interest income and lower provisions were recorded. Moreover, rise in deposits was another tailwind. Yet, lower loans and rise in expenses were undermining factors. Further, decline in net interest income was a major drag.

Net income came in at $269 million in the quarter, down 13.2% year over year.

Furthermore, segment wise, on a year-over-year basis, net income decreased 3% at Business Bank, 52.2% at Retail Bank and 9.4% at Wealth Management. The Finance segment reported net loss as against the income recorded in the prior-year quarter.

For full-year 2019, adjusted net income was $1.19 billion or $7.81 per share compared with the prior year’s $1.24 billion or $7.24 per share. Earnings per share surpassed the Zacks Consensus Estimate of $7.74. Notably, the 2019 results include securities repositioning charge and discrete tax items.

Revenues Down, Expenses Escalate

Comerica’s fourth-quarter net revenues were $810 million, down 6.3% year over year. However, the figure surpassed the Zacks Consensus Estimate of $802 million.

For full-year 2019, the company reported net revenues of $3.35 billion, slightly up year over year. Further, it beat the Zacks Consensus Estimate of $3.34 billion.

Net interest income slipped 11.4% on a year-over-year basis to $544 million in the quarter. In addition, net interest margin contracted 49 basis points (bps) to 3.20%.    

Total non-interest income came in at $266 million, up 6.4% on a year-over-year basis. Higher fiduciary income, commercial lending fees and other non-interest income mainly aided the results, partly mitigated by decrease in card fees and service charges on deposit accounts.

In addition, non-interest expenses totaled $451 million, slightly up year over year. The upswing resulted mainly from higher salaries and benefits expense, outside processing fee expense and other non-interest expenses.

Adjusted efficiency ratio was 55.46% compared with the prior-year quarter’s 51.93%. A rise in ratio indicates a fall in profitability.

Solid Balance Sheet

As of Dec 31, 2019, total assets and common shareholders' equity were $73.4 billion and $7.3 billion, respectively, compared with $70.8 billion and $7.5 billion as of Dec 31, 2018.

Total loans were down 2.1% on a sequential basis to $50.4 billion. However, total deposits inched up around 1% from the prior quarter to $57.3 billion.

Credit Quality: A Mixed Bag

Credit metrics were a mixed bag during the reported quarter. Total non-performing assets dropped 6.5% year over year to $215 million. Also, allowance for loan losses was $637 million, down 5.1% from the prior-year period. Additionally, the allowance for loan losses to total loans ratio was 1.27% as of Dec 31, 2019, down from 1.34% as of Dec 31, 2018.

In addition, provision for credit losses came in at $8 million, plunging 50% from the prior-year quarter. Yet, net loan charge-offs surged 90.9% on a year-over-year basis to $21 million.

Strong Capital Position

As of Dec 31, 2019, the company's tangible common equity ratio was 9.19%, down 59 bps year over year. Common equity Tier 1 capital ratio was 10.14%, down from the 11.14% reported in the year-ago quarter. Total risk-based capital ratio was 12.13%, down from the prior-year quarter’s 13.21%.

Capital Deployment Update

Comerica’s capital-deployment initiatives highlight the company’s capital strength. During 2019, the bank repurchased 18.6 million shares for $1.4 billion under its existing share-repurchase program. This, combined with dividends, resulted in a total payout of $1.8 billion to shareholders in the year.

Notably, during the reported quarter, Comerica repurchased 2.1 million shares for $150 million under its existing equity-repurchase program. This, combined with dividends, resulted in a total payout of $246 million to shareholders.

Impressive Outlook for 2020

Comerica has guided for full-year 2020, taking into consideration the current economic and rate environment.

Comerica expects average loans to be up 2-3%. The outlook reflects growth across most lines of business, partly offset by declines in Mortgage Banker Finance and National Dealer Services. Further, average deposits are likely to be up 1-2%, with the focus on attracting and holding relationship based deposits.

The company anticipates lower net interest income, unusually impacted by lower interest rates, funding actions in the prior year and softer non-accrual interest recoveries, partially muted by loan growth. Notably, management expects $10-15 million reduction sequentially in the first quarter, while slight decline is anticipated for the remainder of 2020.

Non-interest income are predicted to be up 1%, driven by growth in card fees and fiduciary income, partially mitigated by reduced derivative and warrant income, with the assumption of no returns on deferred compensation assets.

Non-interest expenses is estimated to flare up 3%, resulting from higher outside processing expenses, in line with growing revenues, technology costs, inflationary pressures and elevated pension expense.

Net charge-offs are anticipated to be at the 2019 levels of 15-25 basis points, with persistent solid credit quality.

Income tax expenses are expected to approximate 23% of pre-tax income.

Common equity Tier 1 capital ratio is targeted at 10%.

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, decline in loans and rise in expenses remain concerns. Apart from this, restricted top-line expansion, eroded by a lower margin, 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 Other Wall Street Biggies

Riding on high revenues, PNC Financial PNC reported a positive earnings surprise of 1.7% in fourth-quarter 2019. Earnings per share of $2.97 surpassed the Zacks Consensus Estimate of $2.92. Further, the bottom line reflects an 8% jump from the prior-year quarter’s reported figure.

Wells Fargo’s WFC fourth-quarter adjusted earnings of 93 cents per share lagged the Zacks Consensus Estimate of $1.12 on lower net interest income and rise in expenses. Results exclude litigation accruals. Including litigation accruals (not tax-deductible) worth 33 cents per share related to certain matters, earnings came in at 60 cents per share compared with the prior-year quarter’s $1.21.

Better-than-expected trading performance and rise in mortgage banking fees drove JPMorgan’s JPM fourth-quarter earnings of $2.57 per share, handily outpacing the Zacks Consensus Estimate of $2.32. Lower interest rates drove mortgage banking fees. Further, as expected, both equity and debt underwriting fees improved, rising 10% and 11%, respectively. Thus, this resulted in an increase in investment banking fees (up 5%) despite a 3% fall in advisory fees.

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