Comerica Bank is on track to reduce its reserves meant to guard against loan losses by the end of the year or in early 2022 — just as demand for new lending is expected to pick up, executives said Tuesday.
The Dallas bank’s timetable for lowering reserves to pre-pandemic levels is ahead of what analysts had been expecting, but executives say they are encouraged by the relative strength of Comerica’s markets and the outlook for a broader economic recovery in the second half of this year.
“We’re in a lot of high-growth markets that we do believe should perform better than the U.S. as a whole as we come out of the COVID situation and hit the second half of the year,” Comerica Chairman and CEO Curt Farmer said on a call with analysts discussing the bank’s fourth-quarter and full-year results.
For now, loan-loss reserves remain elevated. The $85.3 billion-asset bank said its reserves totaled $992 million in the fourth quarter, of 1.81% of loans, up from $668 million, or 1.33% of loans, in the fourth quarter of 2019.
Still, total reserves have actually come down since the middle of 2020, when they topped out at more than $1 billion, or 2% of total loans.
On the call with analysts, Chief Credit Officer Melinda Chausse said she expects the bank will continue shrinking reserves if the coronavirus vaccine proves effective at stopping the spread of the disease and the economy begins to bounce back from the pandemic-induced recession.
“Assuming ... the current level of uncertainty has started to abate, reserve levels are going to come down,” Chausse said on a call with analysts.
The pace of reserve releases surprised some analysts, who weren’t expecting levels to return to normal until the end 2022.
“This is certainly a little bit earlier than we’ve been generally anticipating, but it’s not that much of a stretch depending on how the macro outlook shapes up over the next few quarters,” said Gary Tenner, an analyst with D.A. Davidson.
The reserve release helped Comerica report $215 million in fourth-quarter net income, which was up 1.8% from one year prior.
Total loans increased 2% year over year, to $51.4 billion, but were down slightly from the third quarter. Executives don’t expect demand to strengthen until the second half of the year, when economic growth is likely to accelerate and the government’s effort to stimulate the economy has run its course.
Net interest income increased 2.4% from one year earlier on the higher volume but was down more than 18% for the full year 2020 due to shrinking loan yields brought by the Federal Reserve’s decision to lower interest rates. The bank’s mostly floating-rate loans are particularly sensitive to low rates.
Peter Sefzik, the executive director of Comerica’s commercial bank, said on the call that business in December “felt like a pre-COVID environment.” But the increase in interest for new commercial lending was less concentrated in investments, like factory upgrades, and were more related to financing for mergers and acquisitions and other harder-to-predict moves.
“It does feel better than it did 90 days ago, but it’s just too hard to nail down when it’s going to happen,” Sefzik said of the coming boost in new loans.
Overall, credit quality is stabilizing. About 10.5% loans that were flagged as most at-risk from social distancing measures put in place during the pandemic — from hotels and retail stores to art and recreation centers — were considered criticized at the end of the fourth quarter, about level where it was three months earlier.
On the earnings call, executives were noncommittal when asked how the company may consider deploying excess capital.
Farmer said Comerica has no immediate interest in buying a bank to boost the business, even as a number of regional competitors bulk up through acquisitions. And Chief Financial Officer James Herzog said that the company has no immediate plans to start buying back its stock.
“We’re at the peak of the COVID pandemic,” Herzog said. “We just think it’s prudent to wait for a little more clear line of sight to see where this is going.”
