Comerica foreshadows cost cuts

Comerica in Dallas vowed on Friday to cut costs in coming quarters after reporting increased expenses and weaker earnings.

The $86 billion-asset bank said its third-quarter noninterest expenses increased 4% from the prior quarter and 11% from a year earlier to $555 million. Its deposit costs also jumped alongside peers, owing to a surge in interest rates and increased competition for funding.

Comerica said its deposits grew by $1.6 billion to $65.9 billion during the quarter. But it paid up to do so, increasing interest-bearing accounts. Its average cost of interest-bearing deposits jumped 53 basis points to 290 basis points. Interest-bearing deposits increased by $3.1 billion in the quarter.

"We remain committed to running an efficient organization, and we'll be taking steps to offset expense pressures," Chairman and CEO Curtis Farmer told analysts during an earnings call on Friday. However, he and other executives stopped short of specifics. 

Farmer did say Comerica was already in the midst of evaluating a range of options across its real estate footprint, technology spending and "head count."

Several analysts pressed for more, but executives deferred greater detail until the company's fourth-quarter earnings call, when Farmer anticipated providing a 2024 outlook that could include new expense plans.

"We are in the process of evaluating cost-reduction opportunities," Chief Financial Officer James Herzog said. "Prudent expense management remains a priority as we work to balance our expense base commensurate with our earnings power."

At issue is the spike in interest rates over the past year, which sent funding costs soaring while curtailing loan demand. That combination has crimped most banks' net interest margins, including Comerica's.

The Federal Reserve pushed rates up to combat inflation that reached a 40-year high in 2022. Inflation also has bolstered costs for Comerica and other banks.

"There was a pivot in the industry that's occurred over the last few months, and we're going to have to adjust to that," Herzog said. "So fully committed to getting it done" — lower expenses — "and we'll be sharing more at some later point in time."

Other regional banks have recently announced cost cuts, including PNC Financial Services Group, which said last week it would trim 4% of its workforce to curtail costs by $325 million and prop up its profitability in 2024.

Analysts expect cost cutting to become a broader theme through the end of this year and into 2024.

Keefe, Bruyette & Woods analyst Christopher McGratty expects third-quarter earnings per share in the sector to decline 7% from the prior quarter and 18% from a year earlier amid cost issues, "with additional NIM pressure and slowing loan growth contributing factors."

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Comerica said its loans decreased by $1.4 billion in the quarter to $54 billion. This was driven in part by a decrease of $619 million in the bank's mortgage banker finance division, a line of business Comerica is exiting. That process is expected to be nearly completed by the end of 2023. Mortgage rates have tripled since early 2022, dampening home loan demand.

Comerica also reported a sharp decline in its middle-market lending operation and its equity fund services business.

The bank said it used some of its deposit growth to pay down maturing debt owed to the Federal Home Loan Bank System, helping to reduce interest costs. It also said its average yield on loans increased 16 basis points in the quarter to 6.34%, reflecting higher short-term rates.

However, the intersection of higher deposit costs and softer loan totals crimped net interest income, which decreased $20 million in the quarter to $601 million. Its NIM contracted 9 basis points to 2.84%.

The margin weakness was manifest in the bank's bottom line. Comerica reported third-quarter net income of $251 million, or $1.84 per share, down from $351 million, or $2.60 per share, a year earlier.