DBRS Comments on Q4 ’09 Earnings of Comerica Inc. – Senior at “A” Unchanged

DBRS has today commented on the Q4 2009 earnings of Comerica Incorporated (Comerica or the Company). Before TARP-related dividends, Comerica reported a net loss of $29 million in the quarter, compared to a $19 million gain in the third quarter and a $20 million gain in Q4 2008. The primary difference was that the Company only booked $10 million in security gains in the fourth quarter compared to $107 million in the third quarter and $113 million in the second quarter. After paying $33 million in preferred dividends to the U.S. Treasury, the Company reported a net loss available to common stockholders of $62 million. Core revenue trends were mixed as net interest income improved 2.9% from net interest margin (NIM) expansion, while fee income fell $101 million from the aforesaid decline in security gains. Core expenses were essentially flat after adjusting for $11 million in severance costs.

Positively, the credit picture improved nearly across the board for the Company in the quarter with nonperforming assets (NPAs), net charge-offs (NCOs), loan loss provisions, 90+ day past due loans and watch list loans all improving in the quarter. DBRS noted that the loan loss provision fell for the second consecutive quarter, yet still exceeded Comerica’s net income before provision and taxes (IBPT) by $71 million this quarter. Although credit costs remain elevated and continue to weigh on the quarterly results, they reflected improvement likely indicating an inflection point. DBRS sees that the Company’s franchise strengths, evidenced by expanding NIM, core deposit growth in the quarter and credit quality improvement across the loan portfolio coupled with adequate capitalization, remain intact. As a result, Comerica’s ratings – “A” for Senior obligations and Negative trend – remain unaffected.

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 evidence of improvement in Comerica’s asset quality could mark a turnaround in the Company’s predominantly business focused loan portfolio that has been impacted by ripple effects from high unemployment, the still-unsettled housing sector and a troubled economy. As a result, as provision levels recede from their elevated levels, they could be able to be fully absorbed by income before provisions and taxes (IBPT) levels in 2010. DBRS commented that well-contained credit costs and revenue growth could restore the Negative trend to Stable.

Credit costs improved in the fourth quarter and were in line with Comerica’s expectations as net charge-offs (NCOs) of $225 million declined by $14 million from Q3 2009. A declining 28% of Q4 NCOs were related to commercial real estate development, with middle market credit write-offs increasing to 34% of Q4 NCOs, reflecting continued weakness in its Midwest middle market lending business. For the Midwest region as a whole, NCOs were $97 million for Q4 2009 while the Western region was $85 million. DBRS notes that exposure to shared national credits, residential real estate development, and auto supplier portfolios have all declined while national dealer loans have stabilized. The automobile sector loans continue to perform relatively well and contributed only $3.1 million to NCOs. Comerica’s fourth quarter provision of $257 million added $32 million to loan loss reserves (LLR) and the LLR/loans ratio was up 15 basis points from September 30, 2009 to 2.34% at quarter end.

Nonperforming assets (NPAs) of $1.29 billion decreased 1% from September 30, 2009 the first decrease since Q1 2006, but rose 7 basis points to 3.06% of loans and OREO as the denominator contracted. Real estate construction continues to comprise the largest, although declining, portion of nonaccrual loans at about 43% of total nonperforming loans (NPLs). Loan loss reserves covered NPLs 0.83x compared to 0.80x last quarter, and DBRS notes that Comerica’s NPLs have been marked down 44% as of December 31, 2009, a haircut that compares favorably to peers. Loans 90+ days past due and still accruing declined more than 37% from the end of Q3 2009 to $101 million while watch list loans decreased 6% over the quarter. Due to its commercial banking focus, Comerica has only $16 million in troubled debt restructurings (TDRs) of which $5 million are nonperforming and $18 million in nonperforming reduced rate loans.

Revenue and balance sheet trends were similar to Q3 2009. Average loans declined $2.0 billion (4.5%), reflecting weak loan demand, consistent with this stage of the cycle as businesses remain cautious and NPAs remain high. While total average deposits declined 3.1% in the quarter, it was driven by mostly higher cost CD’s maturing. Additionally, average core deposits (ex-FSD) were up $935 million or 3% to $36.7 billion. Net interest income grew 2.9% to $396 million as higher yielding CD’s rolled off, noninterest deposits increased, loan spreads improved and Comerica’s sizable excess liquidity position declined to an average $2.5 billion in the quarter. These primary factors, which are expected to continue into 2010, contributed to 26 basis point NIM expansion to 2.98%.

Noninterest income declined $101 million from Q3 2009 to $214 million. However, the decline was only $4 million adjusting for security gains. Controlling costs remains a focus for the Company as headcount was reduced by about 850 or 8% in 2009, which enabled Comerica to reduce salary and employee benefit expense by a corresponding 8% for the entire year 2009. Nonetheless, positive operating leverage remains elusive for the Company given the weak loan demand.

Comerica’s capital remains adequate for its risk profile. The Company’s Tangible common equity ratio was 7.99% at December 31, up 3 bps from September 30 and higher than that of similarly rated peers. The estimated Tier 1 common and Tier 1 ratios were 8.18% and 12.46%, respectively at the end of the fourth quarter and would represent strong ratios even if the $2.25 billion in TARP capital were redeemed.

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.