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Tickers in this Article: CMA, JPM, WFC, C
Comerica Inc. (CMA) reported fourth quarter 2012 earnings of 68 cents per share, beating the Zacks Consensus Estimate of 64 cents. Moreover, results surpassed the earnings per share of 61 cents reported in the prior quarter.
Comerica's results reflected growth in its top line along with reduced expenses. Further, growth in average loans and average deposits coupled with improved credit metrics continued to be a positive. However, a decline in the net interest income was the headwind.
 
The company reported a net income of $130.0 million, up 11.1% from $117.0 million recorded in the prior quarter. For full year 2012, Comerica reported a net income attributable to common shareholders of $515 million or $2.67 per share, beating the Zacks Consensus Estimate of $2.65 per share and up from $389 million or $2.09 per share in 2011.
 
Comerica's total revenue of $660 million in the reported quarter went up modestly by 0.5% sequentially. Moreover, it surpassed the Zacks Consensus Estimate of $620 million.
 
For full year 2012, Comerica reported total revenues of $2.7 billion, up 3.8% year over year and above the Zacks Consensus Estimate of $2.5 billion.
 
Quarter in Detail
 
Comerica's net interest income inched down 0.7% sequentially to $424 million. The decline was mainly due to a continued shift in the mix of the loan portfolio, a decline in LIBOR, a decrease in the accretion of the purchase discount on the acquired Sterling loan portfolio and a decline in interest earned on investment securities available-for-sale. These negatives were partially mitigated by lower funding costs and an increase in loan volumes. 
 
Net interest margin fell 9 basis points (bps) sequentially to 2.87%. The sequential decline was mainly due to a continued shift in mix in the loan portfolio, lower yields on mortgage-backed securities, a decline in LIBOR, increased excess liquidity, and lower accretion on the acquired Sterling loan portfolio. These negatives were partly offset by a negative residual value adjustment of 2 bps in the third quarter of 2012 and lower funding costs.
 
Average loans marginally grew 1.2% to $44.1 billion sequentially. This was driven by an increase in commercial loans, partially offset by a decrease in commercial real estate loans (commercial mortgage and real estate construction loans). Average deposits increased 2.9% from the prior quarter to $51.3, largely attributable to an increase of 6.0% in non-interest bearing deposits.
 
Comerica's non-interest income came in at $204 million, up 3.6% sequentially. The sequential rise was mainly attributable to increases in customer driven categories, including commercial lending fees, customer derivative income and fiduciary income, partially mitigated by a decline in letter of credit fees.
 
Non-interest expenses totaled $427 million, down 4.9% sequentially. The decrease was mainly due to a decline in restructuring expenses, lower legal fees and reduced employee benefits expense, partly offset by a hike in severance expense. Notably, non-interest expenses were reduced by $6 million in the third quarter of 2012 due to gains on sales of assets.
 
Credit Quality
 
Credit quality improved at Comerica. Net credit-related charge-offs declined 14.0% sequentially and 38.3% year over year to $37 million.
 
Nonperforming assets to total loans and foreclosed property equaled 1.27% in the reported quarter, down from 1.71% in the prior quarter and 2.29% in the year-ago quarter.
 
Provision for credit losses declined 27.3% sequentially and 11.1% year over year to $16 million. The allowance for loan losses to total loans ratio was 1.37% as of Dec 31, 2012, down from 1.46% as of Sep 30, 2012, and 1.70% as of Dec 31, 2011.
 
For the year 2013, Comerica expects stable provision for credit losses, attributable to loan growth offset by a decline in nonperforming loans and net charge-offs.
 
Capital Position
 
During the reported quarter, Comerica's capital levels remained strong. As of Dec 31, 2012, total assets and common shareholders' equity were $65.4 billion and $6.9 billion, respectively, up from $63.3 billion and $7.1 billion, respectively, as of Sep 30, 2012.
 
As of Dec 31, 2012, Comerica's tangible common equity ratio was 9.71%, down 54 bps sequentially. Moreover, as of Dec 31, 2012 the estimated Tier 1 common capital ratio moved down 24 bps sequentially to 10.11%. 
 
Capital Deployment Update
 
Comerica's capital deployment initiatives, through dividend payment and share buybacks, exhibit its capital strength. During the reported quarter, Comerica had bought back 3.1 million shares for $93 million under its current share repurchase authorization. This, combined with dividend, resulted in a total payout of 93% of net income to shareholders in the fourth quarter. We expect such activities to further boost investors' confidence in the stock.
 
Outlook 2013
 
Comerica has provided a detailed outlook for 2012. Given the continuation of the current economic environment, the company's outlook for full year 2013 is a modest one. Compared to the full year 2012 level, management expects reduced net interest income, attributable to a decline of $40 million-$50 million in purchase accounting accretion and the effect of a low rate environment, partially mitigated by loan growth.
 
Customer-driven non-interest income is projected to increase based on cross-sell initiatives and selective pricing adjustments. Further, non-interest expenses are anticipated to fall due to cost savings based on tight expense control and no restructuring expenses. Income tax expense is anticipated to be roughly 36.5% of pre-tax income.
 
Peer Performance
 
One of the other big Wall Street players, Wells Fargo & Company (WFC), started the earnings season this time and achieved its twelfth consecutive quarter of growth in earnings per share by reporting earnings of 92 cents in fourth quarter 2012. Results improved from earnings per share of 88 cents reported in the prior quarter and 73 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.
 
Results at Wells Fargo benefited from improvement in top line, aided by an increase in all segments' revenue. It also reported $250 million in reserve release (pre-tax), attributable to improved portfolio performance. On the flip side, the company experienced a rise in non-interest expenses.
 
Our Take
 
Going forward, we believe Comerica's continuous geographic diversification beyond its traditional and slower-growing Midwest markets could drive growth over the next cycle. Revenue synergies from the Sterling acquisition should augment its top-line growth. Further, the company's capital deployment activities augur well for investors.
 
Yet, the company's significant exposure to commercial real estate markets, the unsettled economic environment, low interest rate and stringent regulatory issues are matters of our concern.
 
Comerica currently retains a Zacks Rank #3 (Hold).

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