Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Comerica Inc (CMA, Financial) reported second-quarter earnings of $206 million, or $1.49 per share, outperforming the first quarter.
- Credit quality remained strong with net charge-offs at 9 basis points, below historical averages.
- Noninterest income increased by $55 million, driven by growth across most customer-related categories.
- Expenses improved by $48 million over the prior quarter, with significant reductions in salaries, benefits, and FDIC expenses.
- The company's estimated CET1 ratio grew to 11.55%, remaining above the 10% strategic target.
Negative Points
- Average loans declined due to muted first-quarter demand and low utilization trends in certain sectors.
- Average deposit balances decreased by $2.3 billion, with significant pressure on noninterest-bearing balances.
- Net interest income decreased by $15 million, impacted by lower Fed deposits and loan balances.
- Comerica Inc (CMA) was not selected to continue serving as the financial agent for the Direct Express prepaid debit card program, potentially impacting future deposit balances.
- The company expects a 14% decline in net interest income year-over-year due to ongoing deposit and loan pressures.
Q & A Highlights
Q: Can you walk us through the steps and timeline for the Direct Express transition? What will happen to the $3.3 billion of average deposits?
A: (Peter Sefzik, Chief Banking Officer) The transition process is still being determined, and we hope to have more clarity in the coming quarters. We believe the transition will be longer rather than shorter due to the complexity of managing 4.5 million cardholders. Our focus is on ensuring a smooth transition for customers. We plan to redirect resources to focus on our core relationship model and replace these deposits over time with core customer deposits.
Q: How does the potential loss of the Direct Express program impact Comerica's strategic direction and earnings power?
A: (James Herzog, CFO) Our intention is to replace these deposits over time with core customer deposits that better fit our business model. In the short term, there will be no effect, and we expect a gradual transition. Strategically, we start with a strong balance sheet and low levels of wholesale funding, so we don't foresee a significant impact. Our goal is to minimize any medium-term impact and maintain long-term profitability.
Q: How do you plan to manage the balance sheet in light of the competitive environment for deposits?
A: (James Herzog, CFO) We expect our bond portfolio to continue generating cash to fund loan growth through the end of the year. We don't plan to rely on the bond portfolio for the Direct Express transition, which is a longer-term issue. Our focus remains on maintaining a strong balance sheet and leveraging our national presence and diverse business model to attract deposits.
Q: What factors are driving the current pressure on noninterest-bearing deposits, and when do you expect this trend to reverse?
A: (James Herzog, CFO) The pressure on noninterest-bearing deposits is primarily due to the high-rate environment. We believe we are at the apex of this cycle, and as rates begin to decline, we expect an inflection point in deposit balances. We anticipate a slight increase in noninterest-bearing deposits in Q4 and continued growth into 2025.
Q: How do you view the competitive environment for regional banks, and what is Comerica's strategy in this context?
A: (Peter Sefzik, Chief Banking Officer) The competitive environment is challenging, but our national presence and diverse business model provide us with advantages. We have been national for a long time, and our various businesses allow us to attract deposits and customers in different ways. We continue to focus on organic growth and leveraging our strengths in core markets.
Q: What are your expectations for loan demand in the second half of the year, and what factors are influencing this outlook?
A: (Peter Sefzik, Chief Banking Officer) We expect loan demand to pick up in the second half of the year, driven primarily by interest rates. Our pipelines are strong, and we anticipate positive point-to-point loan growth for 2024. However, real demand may not significantly increase until interest rates come down and we get through the election period.
Q: Are there any emerging pressures or trends in the C&I portfolio that you are monitoring?
A: (Melinda Chausse, Chief Credit Officer) We saw improvement in the C&I portfolio this quarter, with broad-based improvement across various industries. Customers exposed to the consumer sector may face more challenges, but overall, we feel good about the C&I portfolio. We continue to monitor for any idiosyncratic events and believe we are well-reserved for potential issues.
Q: What are the key factors that will drive noninterest-bearing deposit growth in 2025?
A: (James Herzog, CFO) The key factors include the rate environment, business activity, and overall economic growth. As rates decline, we typically see noninterest-bearing deposits grow. Additionally, as GDP grows, working capital levels within middle market businesses are expected to increase, supporting deposit growth.
Q: How does Comerica's strategic focus on organic growth align with the current M&A environment?
A: (Curtis Farmer, CEO) We have been patient with acquisitions, focusing primarily on organic growth. We see good opportunities for growth in our existing markets and new markets we have expanded into. While we remain open to strategic acquisitions that make sense culturally and geographically, our primary focus continues to be on organic growth.
Q: What are the expectations for credit quality in the coming quarters?
A: (Melinda Chausse, Chief Credit Officer) We expect credit quality to remain strong, with manageable levels of migration. The C&I portfolio has shown improvement, and the commercial real estate portfolio continues to perform well. We are well-reserved for potential issues and believe ongoing migration will remain manageable.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
