In the last quarter of the year, Comerica earned $128 million (or $0.68 per diluted share). This brought full-year net income to $515 million ($2.67 per share), or 32% higher year over year. Investors were pleased to see profitability inch higher, with ROE going to 7.4% in 2012 from 6.2% in 2011.
The fourth quarter saw Comerica’s last charge related to the Sterling acquisition. Going forward, analysts see no major obstacle in the firm’s path that could substantially raise noninterest expenses. In addition, credit quality keeps improving. Sequentially, fourth quarter non-performing loans fell by 22% and now stand at a very manageable 1.2% of the total portfolio.
In addition, reserve coverage (allowance for loan losses/nonperforming loans) crossed the 1.0 times level for the first time since the onset of the crisis and was 1.2 times at year-end. With dud loans declining and a sturdy reserve base, we do not anticipate provisions will significantly hinder earnings in the near term.
In our view, the biggest obstacle that Comerica’s bottom line faces is revenue generation. Specifically, after regulation curtailed fee income, banks have to rely more and more on interest revenue. Until rates begin to rise, interest income will not post meaningful increases due to the pressure that the low-rate environment exerts on interest margins. As with most banks, Comerica’s net interest margin contracted in the fourth quarter and was an annualized 2.9% (a 10-basis-point sequential decline).
In terms of capital, there are few concerns with Comerica. At year-end, the bank’s tangible common equity and Tier 1 common ratios were 9.7% and 10.1%, respectively (versus 10.3% and 10.4% in September), which are healthy. Investors like that management returned a fair chunk of money to shareholders in the absence of more profitable growth avenues. While the quarterly $0.15 common dividend made up just under 25% of Comerica’s earnings, when combined with share buybacks the company returned more than 90% of fourth-quarter income to shareholders.
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