Comerica Earnings: Tepid Loan Growth in Third Quarter

Key Morningstar Metrics for Comerica

• Fair Value Estimate: $80.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

Comerica CMA reported underwhelming third-quarter earnings results. While revenue grew 3% year over year, expenses were up 5% compared with the prior year. Earnings per share came in at $1.35, up 1.5% year over year.

Why it matters: The bank’s loan growth has been tepid in the past several quarters, with third-quarter average loan balances relatively flat at $50.8 billion. Net interest income of $574 million was also flat compared with the previous quarter’s $575 million.

• While Comerica’s interest-earning asset yield was relatively flat, the bank’s cost of interest-bearing liabilities increased 4 basis points from the prior quarter, with net interest margin, or NIM, compressing 7 basis points. The bank’s sequential compression in its NIM was worse than most of its regional peers that have reported.
• As the Federal Reserve cuts short-term rates, it should be a relief to Comerica’s funding costs in the near term.

The bottom line: As we incorporate Comerica’s latest results, we expect to maintain our $80 per share fair value estimate for the no-moat-rated bank and view the stock as slightly undervalued.

Key stats: We are seeing increased market concerns over credit risks in the US regional banks following the collapse of both Tricolor and First Brands. While Comerica didn’t disclose any exposure to either of these two firms, the bank’s higher-risk leveraged lending portfolio accounted for less than 6% of its total loan book at the end of the prior quarter.

• Comerica’s net charge-off ratio was 0.25% in the quarter. While this was an increase from the prior two quarters’ range of 0.21%-0.22%, it is still at the lower end of the bank’s long-term range of 20-40 basis points. Meanwhile, its nonperforming loan ratio was 0.51%, lower than its past fourth-quarter average of 0.55%.
• Provisioning expenses declined $22 million sequentially to $22 million, while the bank’s allowance/loan loss ratio was 1.43%, a decline of 1 basis point from the previous quarter.