Comerica Confronts Questions on Energy Loans

Comerica Bank building in Dallas is shown in this 2009 photo. ENLARGE
Comerica Bank building in Dallas is shown in this 2009 photo. Photo: Matt Nager/Bloomberg News

Comerica Inc. CMA -1.08 % said more of its energy borrowers were facing financial strains in the third quarter as oil and gas prices remained low.

The Dallas-based lender said it classified about $ 480 million worth of energy loans as “criticized” in the quarter, meaning the bank had concerns about the borrowers’ financial condition. The bank said non-accrual loans and charge-offs, where the lender is uncertain the loan will be paid back on time or has given up on collecting, remained low.

“Energy is still getting worse at a relatively quick pace,” John Pancari, an analyst at Evercore ISI, said of the bank’s results. But the bank “didn’t see losses spike and they didn’t have to add to their reserves in a big way.”

Comerica shares dropped 1.3% in Friday afternoon trading, while the KBW Nasdaq NDAQ 0.11 % bank index was down about 0.2%.

More than $ 1 billion of the bank’s $ 3.2 billion in energy loans and $ 615 million worth of loans in other businesses that are closely tied to energy are now classified as criticized. That energy exposure, about 8% of the bank’s $ 49 billion in overall loans, was relatively high among big regional lenders.

Falling oil and gas prices have pinched the energy industry over the past year and many industry observers have predicted the trouble will soon trickle down to banks that lend to companies in the sector.

Overall, Comerica said profit slid 12% in its latest quarter. Per-share earnings still beat Wall Street expectations.

The regional bank reported a profit of $ 136 million, down from $ 154 million a year earlier. On a per-share basis, earnings dropped to 74 cents from 82 cents. Analysts anticipated 70 cents a share in profit, according to Thomson Reuters.

Analysts Friday discussing the company’s earnings on a conference call peppered Comerica executives with questions regarding energy exposure. The executives declined to elaborate on some specific energy-lending metrics the analysts asked for but said that the company is comfortable with its energy exposure and that any issues with borrowers in the sector would be well-managed.

Comerica said it set aside $ 26 million for potential losses overall. That amount is up from $ 5 million a year earlier, but it is also down sharply from the $ 47 million second-quarter provision.

The bank also classified about $ 25 million of energy-related loans as being transferred to nonaccrual status in the quarter. That number came down from about $ 100 million in the previous quarter. Net loan charge-offs remained low but rose to $ 23 million from $ 3 million.

Fee-based income helped offset some of the drag stemming from energy and low interest rates. Many banks have worked to amp up fee-based businesses to help counter the effect of low rates. Noninterest income rose about 23% to $ 264 million in the third quarter.

Meanwhile, the lender’s net interest margin, a key metric of lending profitability that is tied to rates, slid to 2.54% from 2.65% in the second quarter and 2.67% a year earlier.

In the face of low rates and low oil prices, Comerica Chief Executive Ralph Babb said the lender continues to tightly manage expenses. But the bank has also said that expenses would rise this year, and in the third quarter noninterest expenses jumped 16% to $ 461 million.

Comerica on Friday repeated that noninterest expenses would be moderately higher for the year. The levels of litigation expenses and compensation-related costs booked during the latest quarter “aren’t expected to repeat but are difficult to predict,” the bank said.

Write to Rachel Louise Ensign at [email protected] and Lisa Beilfuss at [email protected] Markets

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