Comerica remains bullish on energy even as pandemic roils sector

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Comerica Bank in Dallas set aside a smaller provision for loan losses in the second quarter than analysts had guessed even as troubled loans to oil and gas companies piled up and the number of positive COVID-19 cases spiked in its key markets of Texas and California.

Comerica was aggressive earlier in the year when it set aside higher provisions than its peers. The company reported $138 million in provisions in the second quarter, down from $411 million in the previous three months. Nonperforming loans outside of energy actually declined by 2% from the previous quarter to $169 million.

Comerica Chief Credit Officer Melinda Chausse
The oil and gas sector presents Comerica's biggest challenge, Chief Credit Officer Melinda Chausse says, but “we are very committed to the business and have no plans on selling the portfolio."

Analysts at Piper Sandler had forecast a second-quarter provision of $278.8 million

“We do feel a little bit better about where we are at the end of [the second quarter] than we were at the end of [the first quarter],” Comerica Chief Credit Officer Melinda Chausse said on a call with analysts Tuesday.

The lower provision helped Comerica report net income of $113 million for the period after a $65 million loss in the first quarter, though the result was still less than half of the $298 million in profits booked during the second quarter of last year.

Investors rewarded the bank’s optimism on provisions as shares traded more than 6% higher Tuesday.

The Piper Sandler analysts said in a note Tuesday that Comerica was “one of the few large banks we have seen to experience such a dramatic [linked-quarter] decline in credit costs.”

Still, positive COVID-19 cases have been surging in Comerica’s home state of Texas and its other major market of California, risking the economic recoveries there. Comerica reported that 5.6% of its commercial loans tied to other industries hurt by the economic shutdown like hotels, retail stores and professional sports franchises, are considered criticized, up from 3.6% at the end of the first quarter.

Comerica CEO Curt Farmer praised leadership in one of its other major markets, Michigan, for its early response to the crisis and for thwarting a resurgence now seen in Texas and California where reopenings are being reversed.

“The governors of [Texas and California] and local municipalities are doing the right things and trying to step back and create social distancing and trying to reinforce some of the guidelines around masks, etc.,” Farmer said on the analysts call. “There’s some short-term retrenchment that will occur, but we feel good about the longer-term perspective of all those markets.”

The energy business, which was already hampered by low prices caused by a global supply glut, has weighed heavily on banks during the coronavirus pandemic as consumers have stayed home. The oil and gas sector remains Comerica’s biggest problem, Chausse said.

The $81.6 billion-asset bank, the largest based in oil-rich Texas, reported $841 million in criticized energy loans for the end of June, up 70% from the previous three months and equal to about one in four loans in the portfolio. Nonperforming energy loans, which have already shown missed payments for months, increased 56% from the second quarter to $102 million.

Other lenders have decided to detach from the problematic oil and gas business, even at a discount. The $31.7 billion-asset Hancock Whitney in Gulfport, Miss., agreed to sell nearly $500 million of its energy loans to Oaktree Capital Management this week for $257.5 million.

But Comerica is avoiding that route.

“We are very committed to the business and have no plans on selling the portfolio,” Chausse said.

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Commercial lending Loan-loss provisions Coronavirus Energy industry Earnings Regional banks Comerica Bank