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Comerica: Provision Expense Likely To Decrease But Remain Above Normal

May 07, 2020 9:08 AM ETComerica Incorporated (CMA) Stock2 Comments
Sheen Bay Research profile picture
Sheen Bay Research


  • The bottom line will likely return to being positive in the remaining three quarters of the year, but will likely remain below the 2019 level.
  • Provision expense will likely trend downwards because the bulk of the COVID-19 impact appears to have been incorporated in the first quarter. However, provision expense will likely remain above normal.
  • High sensitivity to interest rates will lead to further compression in net interest margin.
  • Non-interest income will likely decline further on the back of market-based fees.
  • The impact of COVID-19 on provision expense in the future is uncertain, which poses risks to earnings and valuation.

Comerica Incorporated (NYSE:CMA) made a loss of $0.46 per share in the first quarter, down from $1.85 in the fourth quarter of 2019. The loss was mostly attributable to a hike in provision expense to $411 million from $8 million in the previous quarter. The provision expense will likely decline in the remainder of the year because the economic forecasts used for determining the reserve level currently seem to be reasonable. However, exposure to hard-hit industries will keep the provision expense for the remainder of 2020 higher than the 2019 level. Furthermore, continued compression in the net interest margin will likely pressurize earnings. Additionally, a drop in non-interest income due to lower market-related fees will likely constrain the bottom line. On the other hand, continued loan growth will support the earnings. I'm expecting CMA's bottom line to return to being in the black in the second quarter. For the full year, I'm expecting CMA to post positive earnings of $2.48 per share, down 69% from 2019. The impact of COVID-19 on provision expense is uncertain; hence, there are chances that actual results will differ materially from the estimates. The December 2020 target price suggests a high upside from the current market price. Nevertheless, I'm adopting a neutral rating on CMA because of the uncertainties.

Hard-hit Industries to Keep Provision Expense Above Normal

CMA's provision expense surged to $411 million in the first quarter from $8 million in the fourth quarter of 2019. The provision expense will likely trend downwards in the coming quarters as CMA seems to have incorporated a stressful economic outlook in its allowances, as mentioned in the earnings presentation. To determine the incremental reserves needed, CMA assumed GDP contraction between 13% and 33%, which seems reasonable under the current circumstances. Moreover, CMA incorporated U and V-shaped recoveries depending on the sector, which is

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Sheen Bay Research profile picture
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

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Comments (2)

viggen profile picture
Thanks for the great article! Long!
Left bank profile picture
Thank you. Good read. Long CMA!
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