Comerica Earnings: Decent Quarter, but Net Interest Income Outlook a Bit Soft

Key Morningstar Metrics for Comerica

• Fair Value Estimate: $73.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Comerica’s Earnings

Comerica CMA reported a decent fourth quarter. With many moving parts—such as the preannounced charges related to the discontinuation of the Bloomberg Short-Term Bank Yield Index, elevated restructuring charges, and FDIC assessment charges—consensus estimates may not offer meaningful comparisons with actual results. In our view, the firm’s net interest income outlook was a touch soft as deposit costs continued to rise. Overall, we maintain our fair value estimate of $73 and regard the firm’s shares as undervalued.

Net interest income continues to bottom out. NII in the quarter was $584 million, down 3% from the third quarter, driven by a 6% decline in average assets. NII improved as a higher yield on variable rate loans and a reduction in FHLB funding costs were offset by higher deposit funding costs. Deposits continue to rotate into interest-bearing, with interest-bearing deposits being 58% of the firm’s mix, up from 56% in the third quarter. We expect this trend to continue.

We note that the firm’s NII outlook is for a decline of 11% in 2024, which implies about $2.24 billion, below our estimate of $2.33 billion. Fee revenue, which is about 30% of the firm’s revenue, was relatively healthy excluding its hedge accounting loss. Expenses were $718 million, or $609 million excluding FDIC special assessments in the quarter, and were a bit elevated due to restructuring. Looking ahead, Comerica expects a 3% adjusted expense growth in 2024. We believe slowing inflation should help expense pressures.

Overall, credit quality is healthy, in our view, but certain metrics are showing an uptick. Nonperforming assets increased to $178 million from $154 million in the third quarter, and net chargeoffs rose. We note that these metrics are below historical averages, and as such, we are not too concerned about the uptick.