Comerica signals tougher market for liquidating energy assets
Comerica, the largest bank based in Texas, indicated Wednesday that it’s becoming tougher for lenders to liquidate troubled assets in a more volatile energy market.
The $71.2 billion-asset bank added $44 million in provisions against credit losses during the second quarter tied mostly to a few troubled oil and gas loans, according to its financial disclosure.
The Dallas bank said it would be adding $25 million to $35 million in provisions per quarter for the year, an increase above its previous guidance.
Comerica struggled through the 2014 collapse in oil prices and is still dealing with some of those loans. Many energy lenders had been taking advantage of a flood of private-equity dollars into a U.S. oil boom since then to recover some of its losses, but these investments appear to be drying up or at least investors are growing more conservative.
Curt Farmer, who took over as chief executive for Ralph Babb in April, said the bank’s energy book is in “very good shape” but there is a “decreased appetite” among private investors to buy up “damaged” oil and gas properties and equipment as prices have become less stable. The bank had to lower the value of these assets on its book as a result.
The move jostled analysts Wednesday as they questioned executives over whether they see deeper troubles ahead. Farmer said it had been such a “benign” credit market for so long that their changes to credit loss provisions for the second quarter signals a return to a typical environment.
“This reflects closer to what we consider normal,” Farmer said.
Despite the tighter market for troubled assets, Comerica is making more loans to oil and gas companies as the industry is relying more on debt in the absence of private capital. Its energy portfolio increased 38% over the past year to $2.5 billion, though that remains below the $3.5 billion high at the end of 2014, according to its earnings presentation Wednesday.
“We do not know of anything out there that is of concern to us,” Farmer said.
However, the bank, which is known for being more sensitive to changes in borrowing costs compared to its peers, is bracing for potential interest rate cuts by the Federal Reserve later this year. Comerica had been benefiting heavily from the central bank’s rate hikes in recent years.
The bank reported compressed interest rate margins on Wednesday and missed on its profits. It earned $1.94 per share in the latest quarter, short of analysts' consensus estimate of $2, according to FactSet Research Systems.
Comerica reported net income of $298 million for the second quarter after profits of $326 million for the same period last year. Revenue of $853 million was up slightly from one year ago.