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WIKI ANALYSIS
Comerica (CMA) is a Dallas, TX-based banking and financial services company. With nearly 11,000 employees and 400+ banking offices, CMA is one of the top 20 banks in the country. CMA delivers financial services in four primary geographic markets: Michigan/Midwest, California/West, Texas, and Florida, but also has operations in numerous other states, as well as Canada and Mexico. Net interest income constituted roughly 71% of its core net revenues in 2006, while service charges on deposits, fiduciary income, and other non-interest sources represented the remainder. The company recently relocated its headquarters to Dallas, Texas, in an effort to position itself in a more central location, with greater accessibility to all of its markets.
CMA divides its services into three primary segments: Business Bank, Small Business & Personal Financial Services, and Wealth & Institutional Management. The Business Bank is mainly engaged in business and asset-based lending, middle-market lending, cash management, global finance, institutional trust, and international trade finance. CMA is one of the most commercial-oriented of the large-cap banks. Small Business & Personal Financial Services offers deposit products, consumer loans, mortgage origination, trust services, small business banking, and private banking to individual customers. Wealth and Institutional Management provides institutional trust, retirement, life, disability, and long-term care insurance, annuities, investment banking, and brokerage services.
Commercial loans are a large segment of CMA's loan portfolio, a rare phenomenon among the largest banks, accounting for 56% of the average loans outstanding in 3Q07, followed by real estate (both consumer and commercial) at 34%, with other consumer, international and lease finance accounting for 10% in total. The securities portfolio has been fairly steady at a conservative 7-8% of average earnings assets over the last couple of years. Non-interest-bearing and other low-cost deposits funded 50% of average earning assets in the quarter, with time deposits and borrowing funding 25% and 20% respectively. As of September 30, 2007, CMA had $59.8 billion in assets, $49.8 billion in loans, and $41.1 billion in deposits.
Loan growth showed improvement in 2006, though growth clearly slowed during the second half. On a year-over-year comparison, loan growth has been decelerating in the consecutive quarters, increasing by 3.63% in the third quarter as compared to 4.17% in the second quarter of 2007. C&I demand tells a similar story, with average commercial loans up 1.8% year-on-year in the third quarter, after 2.7% growth in the second quarter of 2007 and 4.3% growth in the first quarter of 2006. CMA is among the most commercial-oriented of the large-cap banks, which should bode well during this phase of the credit cycle, and perhaps support investor sentiment as well.
CMA is expanding its foothold in the Western and Sun Belt markets, opening banking centers in Orange County, Los Angeles, the San Francisco area, southern Florida, and northern Texas. CMA has plans to expand its reach and product offerings in fast-growing markets in California, Arizona, Texas and Florida over the next four years. Success is not guaranteed, and others are moving in the same directions, but continuing geographic diversification beyond CMA's traditional and slower-growing Midwest markets could help drive better growth over the next cycle.
NIM continues its downward trend for the past couple of quarters in view of the more competitive deposit environment and larger investment portfolio. Though the first quarter showed a 7 bps improvement sequentially, there was a decrease of 6 bps in the second quarter and a further decrease of 10bps in the third quarter. We also note that the contribution from low-cost deposits has been declining every quarter for the last two years.
Cost containment is also active, with management guiding to flat non-interest expense in 2007. Despite the opening of 13 new branches during the first nine months of 2007, CMA was able to keep costs under control. The company is on pace to open about 30 banking centers in 2007.
Finally, capital levels remain respectable in our view, with tangible equity at 8.2% of tangible assets. CMA repurchased 2.0 million shares in the third quarter (as compared to 3.5 million in 2Q07, 3.4 million in 1Q07, 6.6 million shares in 2006 and 9 million shares in 2005), and management clearly has the flexibility to maintain this pace for some time.
Top-line growth remains somewhat elusive. Our expectation had been that once commercial lending improved, CMA would make up for lost time and show significant improvement. Unfortunately, CMA is benefiting less at this point than we would have expected, and management continues to guide toward only mid-to high-single-digit loan growth.
The cost reduction story seems to have lost its punch as well, with growth now coming from branch expansion, technology and product development, all of which involve increased expenses. The core tax-equivalent tangible efficiency ratio (as we calculate it) has increased in each of the last four years, and it remains to be seen whether, going forward, it can maintain the pullback apparent in the first quarter.
Finally, while the company is trying to diversify its geographical footprint, it still derives about 50% of its revenues from the Midwest markets, especially Michigan, where the economic environment has continued to be increasingly challenging for the past few years. In terms of products also, CMA's exposure to Commercial Real Estate in the difficult markets of Michigan, California and Florida remains a big concern. As a result of the above, the credit quality has declined in the recent quarters. During the third quarter, the NPAs increased by $32 million sequentially whereas the allowance for loan losses increased only by $5 million. Further, though CMA reported moving $94 million of loans to non-accrual status, the sequential increase was reported only at $ 32 million, the remaining non-accruals were reported to be sold or written-off. We expect higher loan losses and heavier provisioning in the coming few quarters. However, CMA has no subprime loans in its portfolio.
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