Morningstar | Comerica Slows Slightly in 3Q, but More Margin Gains Still Ahead
Narrow-moat-rated Comerica reported decent third-quarter results. The bank’s overall profitability measures came in fairly close with last quarter’s, which were some of the best we have seen for Comerica in over a decade. These results fit in well with our overall thesis for the company, and after some minor adjustments throughout our model, we are decreasing our fair value estimate to $89 per share from $90. Diluted earnings per share came in at $1.86 for the current quarter, very close to the $1.87 we saw last quarter. The return on average common equity was again above 16%, at 16.15%. Comerica is on course to easily exceed $6.00 in earnings per share this year. With room for net interest margins to expand even further, more gains from expense controls, and additional capital efficiencies still in the cards, we would expect earnings and returns to increase even further from here.Comerica remains our most rate-sensitive bank, but net interest margin expansion this quarter was limited. Net interest margins stalled out at 3.60% this quarter, compared to 3.62% last quarter. This was largely due to higher rates and balances in wholesale funding, as well as some declines in nonaccrual interest. We wouldn’t make too much of a single quarter, and given that roughly 90% of Comerica’s loan book is variable rate, we would expect further net interest margin expansion in the longer term. In our view, however, this is a correct indication that much of the gains from rising interest rates have already played out, and increasing funding costs will slow net interest margin expansion for the industry.
Credit quality remained pristine, as provisioning was zero for the quarter and criticized loans continued to decrease. Balance sheet growth was limited, with average loans roughly stable year over year and average interest-earning assets down slightly. Noninterest income growth was again a bit stagnant. Taking out securities losses for the quarter, noninterest income technically did grow 2.4%; however, we are still not seeing much growth in the fiduciary income line quarter to quarter. Card fees were up just over 3% since the first quarter. We would hope to see some more consistent growth from these items, particularly as the Gear Up initiative enters its final year. Expenses remained well controlled, roughly flat quarter over quarter. The bank’s efficiency ratio is now consistently below 55%. We expect positive operating leverage next year as well.
Comerica is a financial holding company, engaged in lending to and accepting deposits from businesses and individuals. The company's segments are: Business Bank, which provides commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services; Retail Bank, which provides consumer lending, consumer deposit gathering and mortgage loan origination; and Wealth Management, which provides products and services consisting of fiduciary services, private banking, retirement services, investment management and advisory services, investment banking and brokerage services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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