Comerica reported strong loan growth across many of its business lines in the first quarter, but it's the bank's exposure to the energy sector that continues to draw the most attention from analysts and investors.
In an earnings call Friday, Comerica officials were bombarded with questions about the turmoil in the oil-and-gas industry brought on by falling prices and its potential impact on the bank's bottom line. While executives disclosed numerous steps they are taking to monitor energy clients in Texas, analysts still pressed hard for more details on reviews of energy portfolios and the levels of reserves set aside for potential losses.
Mike Mayo, an analyst at CLSA, asked if Comerica's lenders had the experience to manage the sudden reversal of fortune in the energy sector given that the bank had little presence in Texas during the last industry downturn in the 1980s. Ken Zerbe, an analyst at Morgan Stanley, seemed frustrated that Comerica would not disclose what percentage of its loan-loss allowance was related to oil and gas loans.
"I'm worried that by not disclosing it, you run the risk of leaving it open to investors' imaginations," Zerbe said in an exchange with Chief Financial Officer Karen Parkhill.
Comerica Chairman and Chief Executive Ralph Babb largely downplayed the inexperience concerns, noting that many of its senior leaders have been lending to energy firms for decades. He also pointed out that the Texas economy is far more diverse than it was three decades ago.
"When you look at it overall, energy is less than 15% of [gross domestic product] in Texas and less than 2.5% of employment," Babb said on the conference call. The downturn "will have an effect in slowing the economy, but it's much different than it was historically."
Comerica officials also pointed to strong loan growth in other markets and industries as evidence that the company is large and diverse enough to weather a slump in Texas. Comerica is an active lender to automobile dealers, and in the first quarter loans to that group increased 11% from the same period in 2014, to $5.9 billion. The bank also reported double-digit loan growth in its technology and life-science and warehouse-mortgage lines of business.
Overall, the company said that total average loans increased 6.8% for the quarter, to nearly $48.2 billion. However, its earnings fell 3.6% year over year, to $134 million, due to shrinking loan yields and a 56% increase in its provision for loan losses, to $14 million. Its earnings per share of 73 cents were in line with consensus analysts' estimates.
On the earnings call, company officials said that its loan pipeline increased in the first quarter and that they expect demand to continue to rise, particularly in California, where total loans climbed nearly 10% year over year.
They acknowledged, though, that Comerica's overall performance is likely to suffer this year because of the ongoing volatility in the energy sector.
Comerica's long-term goal is to reduce its efficiency ratio to below 60% it was at 68.55% at March 31 but Parkhill said that with loan-loss provisions likely to increase this year due to weakness in the energy industry, its efficiency ratio could get worse before it gets better.
In a research note, Sandler O'Neill analyst Scott Siefers also said that the pace of loan growth is "not sustainable" because energy loans which actually increased year over year are moving "from a tailwind to a headwind."
Comerica is about halfway through a review of its 365 energy clients and, based on that review, it now classifies 6% of its energy loans as criticized, up from roughly 4.5% three months ago. It expects to complete the review later this spring, Parkhill said.
For the most part, analysts seem to be pleased with the steps Comerica is taking to minimize losses, but they remain wary of the unknown.
On the call, executives noted that many of Comerica's energy clients have lowered their overall bank debt by tapping the capital markets. While that may be a good thing for Comerica's balance sheet, Sameer Gokhale of Janney Montgomery Scott says it does not necessarily suggest that the energy firms are making the adjustments they need to weather the downturn. It is also hard to know if the downturn is temporary crude oil prices actually hit their highest levels of the year this week or if "we are in the early innings" of a prolonged period of uncertainty.
"There are just so many things that are beyond [Comerica's] control," he said.