Comerica Incorporated



13912

|Comerica Incorporated |(CMA – NYSE) |$40.86 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 2Q13 Earnings

Previous Edition: Changes in Estimates, Jul 9, 2013

Flash Update (earnings update to follow)

On Jul 16, 2013, Comerica declared its 2Q13 earnings results. Earnings came in at $0.76 per share, beating the Zacks Consensus Estimate as well as the prior quarter earnings of $0.70. Net income was $143.0 million in the quarter, up 7% from $134.0 million recorded in the prior quarter.

Comerica’s results reflect increased non-interest income and reduced expenses. Further, growth in average loans and deposits along with improved credit metrics were the positives. However, a marginal decline in net interest income was the headwind.

On a fully taxable equivalent basis, Comerica’s total revenue (net of interest expenses) of $623 million in the quarter was up 1% sequentially. However, it surpassed the Zacks Consensus Estimate of $621 million.

Quarter in Detail

Comerica’s net interest income dipped 0.5% sequentially to $414 million. The decline was mainly due to a decrease in the accretion of the purchase discount on the acquired loan portfolio, a decrease in loan yields (due to shifts in the loan portfolio mix), reinvestment yields on mortgage-backed investment securities as well as average balances. These negatives were partly offset by an additional day in 2Q13, an increase in loan volumes and declining funding costs.

Net interest margin declined 5 basis points (bps) sequentially to 2.83%. The sequential decline was mainly due to lower accretion on the acquired loan portfolio, lower loan yields and an increase in liquidity, partially offset by declining funding costs.

Average loans grew 1% to $44.9 billion sequentially. Average deposits nudged up 1% from the prior quarter to $51.4 billion.

Comerica’s non-interest income came in at $208 million, up 4% sequentially. The sequential rise was mainly due to increases in customer-driven as well as non-customer-driven fee income and an annual incentive received from the company’s third-party credit card provider.

Non-interest expenses totaled $416 million, unchanged sequentially. The decline in salary expenses was offset by a $4 million write-down on other foreclosed assets and a rise in outside processing fee expense.

Credit Quality

Credit quality improved at Comerica. Net credit-related charge-offs fell 29% sequentially and 62% year over year to $17 million.

Nonperforming assets to total loans and foreclosed property was 1.10% in the quarter, compared with 1.23% in the prior quarter and 1.85% in the year-ago quarter.

Provision for credit losses declined 19% sequentially and 32% year over year to $13 million. The allowance for loan losses to total loans ratio was 1.35% as of Jun 30, 2013, down from 1.37% as of Mar 31, 2013 and from 1.52% as of Jun 30, 2012.

For the year 2013, Comerica expects provisions for credit losses to decline due to lower nonperforming loans and net charge-offs, partially offset by loan growth. The provision for credit losses for 2H13 is expected to be similar to the provision for the 1H13.

Capital Position

During the reported quarter, Comerica’s capital levels remained strong. As of Jun 30, 2013, total assets and common shareholders' equity were $62.9 billion and $6.9 billion respectively, compared with $64.9 billion and $7.0 billion as of Mar 31, 2013.

As of Jun 30, 2013, Comerica's tangible common equity ratio was 10.04%, up 18 bps sequentially. Moreover, as of Jun 30, 2013, the estimated Tier 1 common capital ratio moved up 4 bps sequentially to 10.41%. The estimated Tier 1 common ratio under fully phased-in Basel III capital rules was 10.1% as of Jun 30, 2013.

Capital Deployment Update

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. During the reported quarter, the company repurchased 1.9 million shares worth $72 million. This, combined with dividend, resulted in a total payout of 72% of net income to shareholders in the quarter.

Outlook for 2013

Comerica has given an updated outlook for 2013. Given the currently challenging macroeconomic environment, the company’s outlook for full-year 2013 is a modest one. The company expects growth in average loans to continue despite the economic uncertainty, given the continued focus on prudent pricing and structure management.

Further, Comerica expects lower net interest income, reflecting both a decline in purchase accounting accretion and the effect of persistent low rates, partly offset by loan growth. Purchase accounting accretion is expected to be in the range of $25–$30 million for full-year 2013, compared with $71 million in full-year 2012.

Customer-driven non-interest income is expected to remain relatively stable, reflecting the impact of cross-sell initiatives, partly offset by regulatory pressures on certain fees.

Comerica expects lower non-interest expense, reflecting further cost savings by the company due to tight expense control and no restructuring expenses. Additionally, the company expects effective tax rate of around 27.5%.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON CMA.

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Headquartered in Texas, Comerica Incorporated is among the top 25 bank holding companies in the U.S. While providing a full range of traditional banking services, the company focuses majority of its resources on its core business of commercial banking, mainly in the middle-market segment. The company's core operating markets include Ariz., Calif., Fla., Texas and Mich., with selected businesses operating in several other states as well as Canada and Mexico.

Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward a neutral stance, with 54.2% of the firms in the Digest group rating the stock neutral, 33.3% rating it negative and the remaining 12.5% rendering a positive rating. Target prices provided by the firms range from a low of $27.00 to a high of $42.00 per share. The average came in at $36.02, implying a negative return of 10.0%.

Chief Investment Considerations:

▪ Strong capital position

▪ Improving credit quality

▪ Ability to return capital to its shareholders

▪ Synergies expected from the Sterling acquisition

▪ Loan growth challenges

▪ Regulatory issues

Neutral or equivalent outlook – Thirteen firms or 54.2%: With revenue and earnings growth expected to remain challenging in the absence of a material momentum in net loan growth, these firms expect credit and loan growth trends, together with effective expense management to be the main drivers of improved profitability and returns for shareholders. Solid improvements in the market share in Texas and California bring forth top-line growth potential along with a surge in commercial loan growth, attributable to a solid deposit base and well-located branch networks. While the company’s solid capital position and credit quality improvement impress the firms, the near-term headwinds from the low interest rate environment, which is likely to continue pressuring its net interest margin and tamper the growth of net interest income, make them skeptical. In addition, the firms believe that credit metrics have mostly reached normalized levels, and hence the prospects of earnings being driven by improved credit metrics level has somewhat reduced. Hence, affirmed a Neutral stance on the stock considering the expectations of reduced profitability as well as lack of any significant catalyst, the firms.

Negative or equivalent outlook – Eight firms or 33.3%: According to these firms, the outlook for 2013 looks apathetic. Though the company is expected to experience growth in commercial loans, the run-off of the commercial real estate and unstable mortgage banker outstanding is likely to offset the positive growth. This in turn, would affect its average loan growth, thereby restricting significant top-line expansion. Notably, the company’s equity returns are lower as compared to its peers, depicting a bleak scenario of declining profitability. Moreover, a lower net interest margin in the upcoming quarters remains a headwind.

Positive or equivalent outlook - Three firms or 12.5%: These firms believe that Comerica has more growth prospects and capital, less regulatory risks to its business model, and more upside with eventual higher interest rates than many of its peers. Notably, the company had earned sub-optimal profit even amid volative market conditions, thereby depicting strong growth potential as and when the conditions improve. These firms prefer Comerica as the improving asset quality of the company would continue driving provisions lower and assuming renewed business expansion. In addition, a momentum in earning assets would aid interest income. With its specialty in commercial lending, the company is expected to benefit more from the economic growth compared to its less specialized counterparts. As the economy is improving, going forward, they anticipate positive commercial loan trends due to the company’s developing pipeline. Additionally, the firms expect the company to focus on managing its expenses efficiently. However, the continued momentum in earnings growth could be slow due to the tepid economic recovery and a challenging yield curve. Capital levels remain very strong; the company’s focus on solid capital redeployment remains encouraging and is projected to support the stock.

July 9, 2013

Overview [Note: Only highlighted material has been changed.]

Headquartered in Dallas, Texas, Comerica Incorporated is a banking and financial services company. It is one of the top 25 largest commercial bank holding companies in the country. The company delivers financial services in 3 primary geographic markets − Texas, Calif., and Mich. However, it has operations in numerous other U.S. states as well as in Canada and Mexico. The Texas market consists of operations located in the state of Texas. The California market consists of the states of California, Colorado, Washington and also Nevada through 1Q12 with California operations representing a significant majority of California market. The Michigan market consists of the states of Michigan and Illinois with Michigan operations representing the majority of Michigan market. Other Markets include Florida, Arizona, the International Finance division, businesses with a national perspective, Comerica's investment management and trust alliance businesses as well as activities in all other markets in which Comerica has operations.

Comerica boasts a diversified revenue stream. Net interest income constituted about 67.9% of Comerica’s net revenue in 2012, while non-interest income represented the remaining 32.1%.

Comerica has strategically aligned its operations into 3 major business segments: the Business Bank, the Retail Bank, and Wealth Management. In addition, the Finance Division is reported as a segment.

▪ The Business Bank segment offers various products and services, including commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services for middle market businesses, multinational corporations and governmental entities.

▪ The Retail Bank segment includes small business banking and personal financial services, which consists of consumer lending, consumer deposit gathering and mortgage loan origination. In addition to offering a full range of financial services to small business customers, this segment provides an array of consumer products, including deposit accounts, installment loans, credit cards, student loans, home equity lines of credit and residential mortgage loans.

▪ The Wealth Management segment offers products and services such as fiduciary services, private banking, retirement services, investment management and advisory services, investment banking and discount securities brokerage services. Additionally, the sale of annuity products, life, disability and long-term care insurance products are offered by this segment.

Moreover, the Finance segment includes Comerica’s securities portfolio as well as its asset and liability management activities. It is responsible for managing Comerica’s funding, liquidity and capital needs. The segment performs interest sensitivity analysis and executes various strategies to manage Comerica’s exposure to liquidity, interest rate risk and foreign exchange risk.

As of Mar 31, 2013, Comerica had total assets of approximately $$63.5 billion, total loans of $45.1 billion, total deposits of $50.7 billion, and shareholders' equity of approximately $7.0 billion.

The firms identified the following factors for evaluating the investment merits of Comerica:

|Key Positive Arguments |Key Negative Arguments |

|Growth Opportunities |Macro Issues |

|Success in the introduction, implementation, withdrawal and timing of |Economic downturns could result in the delinquency of outstanding loans, |

|business initiatives and strategies, including, the opening of new banking|which could have an adverse impact on Comerica’s earnings |

|centers |Disruptions and uncertainty in the capital and credit markets may limit |

|Comerica is growing its business in non-Midwest markets |Comerica’s ability to access capital and manage liquidity |

|Fundamentals |Concentration of the company’s operations in slow-growing Michigan remains|

|Comerica has an active capital management program |a cause of concern |

|Relocation of the company’s headquarters will help build better |It is overtly dependent on the auto industry and real estate business for |

|relationships in its rapidly growing markets |growth, which have been significantly impacted by unstable economic |

|Synergies gained from the acquisition of Sterling Bancshares Inc. (SBIB) |conditions |

| |The company is also susceptible to fluctuations in interest rate and other|

| |macroeconomic risks |

| |Fundamentals |

| |An increase in the level of provision for credit losses, nonperforming |

| |assets, net charge-offs and reserve for credit losses |

| |Expected decline in top line as a result of Reg E, Durbin Amendment and a |

| |host of other regulatory changes |

| |Stricter capital reserves as proposed by the regulators are likely to |

| |impact the company’s profitability adversely, limit lending volumes and |

| |reduce flexibility with respect to investments |

More information is available online at .

Note: Comerica’s fiscal year coincides with the calendar year.

June 6, 2013

Long-Term Growth [Note: Only highlighted material has been changed.]

Comerica is focused on revenue growth through investments in branches, technology, and products. It is also making a rigorous effort to diversify its geographic presence by reducing its dependence on slow-growing Midwest markets, while increasing its exposure to rapidly growing markets such as California, Arizona, and Texas. Comerica operates through its branches in Michigan, California, Texas, and Florida, with selective businesses operating in several other states as well.

In 2011, Comerica acquired all the outstanding common stock of Sterling Bancshares, Inc., a bank holding company headquartered in Houston, Texas, in a stock-for-stock transaction. The acquisition of Sterling significantly expanded Comerica’s presence in Texas, particularly in the Houston and San Antonio areas. Management believes that the acquisition will prove more beneficial to the company in terms of loan and non-interest income growth. Further, the company may seek to make more acquisitions in the long term at the highly developing Texas region in order to use its current strong capital base and develop earnings.

The firms believe that though short-term headwinds persist with a difficult environment and low interest rates, in the long term, the company’s top line will benefit from rising interest rates, higher operating efficiencies and scale.

Moreover, according to the firms, the environment in which financial institutions will operate following the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, and changes in fiscal policy, may have long-term effects on the business model and profitability of financial institutions that cannot be foreseen at the current level.

June 6, 2013

Target Price/Valuation [Note: Only highlighted material has been changed.]

Provided below is a summary of valuations and ratings as compiled by the Zacks Research Digest:

|Rating Distribution |

|Positive |12.5% |

|Neutral |54.2% |

|Negative |33.3% |

|Average Target Price |$36.02↑ |

|Maximum Upside from Current Price |4.9% |

|Minimum Upside from Current Price |-32.6% |

|Upside from Current Price |-10.0% |

|Digest High |$42.00 |

|Digest Low |$27.00 |

|No. of analysts giving target price/Total |24/24 |

Risks to the target price include renewed asset quality deterioration, a general decline in the value of bank equities, greater-than-anticipated economic deterioration in the company's footprint, failure to execute anticipated merger synergies, acquisitions that the market perceives as too risky and erosion of the company's net interest margin.

Recent Events [Note: Only highlighted material has been changed.]

On Apr 16, 2013, Comerica declared its 1Q13 earnings results. Earnings came in at $0.70 per share, beating the Zacks Consensus Estimate of $0.67 and surpassing the year-ago quarter figure of $0.68.

Comerica’s results reflected reduced expenses. Further, growth in average loans and improved credit metrics were positives. However, a decline in revenues was the headwind.

The company reported a net income of $134.0 million, up 3% from $130.0 million recorded in the prior quarter.

Revenue [Note: Only highlighted material has been changed.]

Prior to 1Q13 earnings release, the Digest net interest income (NII) year-over-year (y/y) growth forecasts were negative 3.7% and 0.2% for 2013 and 2014 respectively. The Digest y/y growth forecasts for non-interest income were 1.1% and 4.2% for 2013 and 2014, respectively. Following the 1Q13 earnings release, the Digest NII y/y growth forecasts changed to negative 3.5% and 0.5% for 2013 and 2014, respectively. The Digest y/y growth forecasts for non-interest income changed to negative 1.1% and increased to 4.3% for 2013 and 2014, respectively. Additionally, the Digest y/y growth forecasts for NII and non-interest income were 4.3% and 2.8%, respectively for 2015. Following the mid-quarter update, the Digest NII y/y growth forecasts changed to negative 5.7% for 2013, increased to 2.6% for 2014 and decreased to 2.2% for 2015. Moreover, the Digest y/y growth forecasts for non-interest income remained unchanged at negative 1.1%, 4.3% and 2.8% for 2013, 2014 and 2015, respectively.

Net revenue (after provision), as compiled by the Zacks Digest model, was $600.0 million in 1Q13, down 4.3% y/y and 2.1% sequentially.

Components of revenue, as compiled by Zacks Digest, are shown in the table below:

|($ in millions) |1Q12A |

|QCA |Kalyan Nandy |

|Lead Analyst |Priti Dhanuka |

|Analyst |Ananya Sarkar |

|Copy Editor |N/A |

|Content Ed. |Priti Dhanuka |

|No. of brokers reported/Total |N/A |

|brokers | |

|Reason for Update |Flash |

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July 16, 2013

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