Missing chapter from Comerica’s turnaround story: Loan growth
Comerica has been in a reorganization mode for two long years that involved layoffs and a significant pullback in energy lending.
The Dallas bank has milked its stagnant balance sheet for all it's worth during that time, relying heavily on higher interest rates, cost cuts and tax reform to raise profits.
It says it's nearing the end of the process, and analysts made it clear Tuesday that investors are impatiently awaiting signs of asset growth. But the big question is if it is nearly ready for growth at exactly the wrong time considering that commercial lending — the bank's bread and butter — has been weak among large banks.
During a conference call Tuesday on third-quarter results, analysts pressed Comerica executives about their outlook for the year ahead. Its total average loans were virtually unchanged from a year earlier at $48.6 billion.
“We all think you need to grow a little bit faster,” said John Arfstrom, an analyst with RBC Capital Markets, noting that the size of the balance sheet has remained flat as the company has made progress on its so-called Gear Up turnaround plan.
Since the plan was announced in July 2016, expenses have plunged. The bank's efficiency ratio fell from nearly 70% to 52.9% as of Sept. 30. Comerica has also slashed its energy portfolio by nearly a third, limiting its exposure to fluctuations in the price of oil.
The changes, while difficult, have put the once-struggling company in a better position to compete with its peers, executives said.
“A lot of the things we went through with Gear Up were meant to help position us for a faster-growing environment,” Comerica President Curtis Farmer said.
In addition to cutting costs, Comerica also invested in technology as part of its turnaround plan, upgrading relationship-management platforms for its front-line bankers, and digitizing its underwriting processes, Farmer added.
During the fourth quarter, Comerica expects loan growth to “trend positive” as lending typically picks up during the final months of the year, Chairman and CEO Ralph Babb said on the call.
But generating loan growth will undoubtedly be challenging as the industry weathers a two-year slump in business lending, with no apparent end in sight.
Commercial loans — which make up just over 60% company’s loan book — dipped nearly 1% during the third quarter to $30.4 billion. Other areas such as consumer lending and residential mortgage loans declined as well.
At the beginning of the year, Comerica executives sounded optimistic that the company could generate loan growth that was in line with the overall economy, Sandler O’Neill analyst Scott Siefers pointed out during the call. Those predictions so far have fallen short.
Comerica simply faces the same pressures as its peers, including pressure from nonbanks and a lower demand for bank debt following the corporate tax cut, Farmer said.
“Customers are sitting on more cash right now, and in some cases they are deleveraging,” Farmer said. “I think beyond that there’s some hesitancy on their part around just trade issues, midterm elections and just the unknowns that might be out there.”
Adding to the pressure on Comerica to boost lending is the fact that deposit costs are beginning to put pressure on the company’s net interest margin.
Following the most recent interest rate hike from the Federal Reserve, Comerica boosted the rates that it pays out on interest-bearing deposits. As a result, during the fourth quarter, executives said they expect deposit rates to increase by between 12 and 15 basis points.
Muneera Carr, chief financial officer, said Comerica has offered higher deposit rates to “select customers and select markets” where competition has intensified.
“It think this is what we see others doing as well, and we respond based on what see in our different markets,” Carr said.
The net interest margin at Comerica rose 32 basis points from a year earlier to 3.60%. Compared with June 30, however, the margin dipped 2 basis points.
Comerica, notably, received no questions during the call about a recent inquiry by Sen. Elizabeth Warren, D-Mass., into allegations of fraud involving a federal benefits program that the company administers.
In August, American Banker reported on hundreds of cases in which the Direct Express program allegedly sent funds to fraudsters who impersonated real account holders.