Comerica Earnings: Solid Quarter, but Loss of Direct Express Program a Negative

Key Morningstar Metrics for Comerica

• Fair Value Estimate: $73.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Comerica’s Earnings

Comerica CMA reported decent second-quarter results. Its outlook for the full year softened slightly, but the big news is that the US government does not intend to renew its contract with Direct Express, a prepaid debit card program for certain recipients to receive federal payments. We expect to reduce our $73 fair value estimate by 5%-15% as we tweak our model.

Direct Express was launched in 2008, and we understand Comerica has serviced the program since its inception. Complaints about administration have bubbled up over the years, including issues with fraud and the use of non-US vendor locations, which is not permitted. In fiscal 2023, noninterest income from the program was $137 million, but this was entirely offset by expenses. The big loss comes from deposits, which average $3.3 billion and are non-interest-bearing.

Comerica’s earnings per share of $1.49 in the second quarter beat the FactSet consensus estimate of $1.19, which we attribute to the lack of loan-loss provisions, expense management, and solid revenue relative to expectations. Net interest income was $533 million, down 3% sequentially on balance sheet shrinkage as net interest margin increased to 2.86% from 2.80%. The shift toward non-interest-bearing deposits is easing and averaged 40.2% of the deposit book in the quarter, down slightly from 40.4% in the first quarter.

For the full year, Comerica now expects net interest income to be down 14% versus down 11%, with the culprit being slower loan demand. Adjusted noninterest income is still expected to decline by 1%. Adjusted noninterest expense is now expected to increase by 4% versus a prior expectation of 3%. Credit quality continues to be mostly healthy, in our view. Nonperforming loans and charge-offs were stable sequentially, and criticized loans decreased.