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Comerica: The Good, The Bad and The Ugly

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The Street has already taken down estimates, making this again, a pricey, underperforming regional headquartered in a city in the midst of a recession.

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Comerica (CMA) reported 3Q '07 headline EPS from continuing operations of $1.17 per share. Stripping out some one-time items ($11 mln of gains from principal investing and warrants, $4 mln in securities gains and $2 mln in costs related to the company's headquarter move), I get a run-rate earnings of $1.11, missing consensus by 11 cents.

The Good:

  • NOTHING!

The Bad:

  • CMA's core revenues declined 4.4% on an annualized basis due to pressure on both spreads and fee revenues.
  • NIM compressed by 10 bps, which was 2x the amount the Street was expecting.
  • Average loans were flat with the prior quarter.
  • Average deposits declined sequentially.
  • Expense growth was above forecast.


The Ugly: Credit Trends

The Street was expecting bad, and they came in awful.

  • Net charge-offs were reported at 0.32 percent of average loans, well above the 0.21 percent forecasted and .24 percent in prior quarter. The level of NPAs increased 12 percent.
  • This despite the large sale of loan book means the company is left holding some pretty lousy loans.
  • It transferred $94 million of loans to non-accrual status in the quarter, yet the q-q increase in NPAs was only $32 million-this is a mismatch!
  • Provision expenses exceeded net charge-offs by $5 million.


Bottom-line: there might be a good skew trade out there. Credit and margin headwinds will accelerate from current levels. The Street has already taken down estimates, making this again, a pricey, underperforming regional headquartered in a city in the midst of a recession. I think the stock, at best, is worth $45 (11% downside).

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Position in CMA.

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