Comerica slows growth of loan-loss reserves as portfolio holds up

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Comerica Bank in Dallas will slow its buildup of loan-loss reserves over the next three months as about $3 billion in credits considered most at risk from the coronavirus pandemic are performing better than expected, executives said Monday.

The decision is a respite for the $81.6 billion-asset company, which like the rest of the industry has been dealing with an economic downturn stemming from the impact of social distancing and other consequences of the outbreak.

Melinda Chausse, chief credit officer, Comerica
“The economic picture today is a little bit better than where we were at the end of the second quarter, and the portfolio certainly has held up," Comerica Chief Credit Officer Melinda Chausse says.

Roughly 6.6% of Comerica loans issued to companies that have been hurt by public health safety measures — like hotels, retail stores and recreation facilities — are considered criticized. That figure is up from 3.6% when the company first reported this specialized statistic in April, executives said at a virtual conference hosted by Barclays Capital on Monday.

However, they said they had expected more damage to the portfolio and considered the 6.6% level to be welcome news. Loans to casinos and sports franchises, which had previously been lumped into its at-risk category, have been removed from it as the criticized and nonaccrual rates have been well below the averages of other categories.

“The social-distancing portfolio has actually been a bit of a pleasant surprise,” Comerica Chief Credit Officer Melinda Chausse said during the conference. “The economic picture today is a little bit better than where we were at the end of the second quarter, and the portfolio certainly has held up. So that would all lead you to believe that we shouldn’t need to add materially to the reserves in the coming quarter.”

Executives cautioned about the potential for another surge in COVID-19 cases during flu season this fall, which could lead to stricter social-distancing measures again and more payment problems if businesses had to close. Comerica’s other areas of concern are loans to energy companies and automakers, which have taken a hit as the economy grinded to a halt.

But prices for crude have steadied around $40 per barrel recently after wild swings in energy markets earlier this year that briefly pushed prices negative in May. Comerica typically adjusts its forecasts for oil prices each quarter to redetermine the risk of its loans but had been forced to do this calculation monthly when the pandemic began, Chausse said.

The bank has about $102 million nonaccrual energy loans as of June 30, more than double the amount at the end of last year, according to its presentation Monday. But Chausse said they are “adequately reserved” for expected losses after setting aside hundreds of millions over the last few months.

“Whether or not we need to build additional reserves depends on the length of the recession, the severity and depth of the recession and then how all that modeling correlates to how our portfolio performs,” Chausse said.

Correction: An earlier version of this story overstated how much the company had set aside in reserves for energy loans over the last few months.

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