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Too few of the small banks willing to sell have businesses worth buying, bank CEOs said during the recent round of earnings calls.
April 30 -
Comerica is generating enough loan growth in its key markets that it is under no pressure to expand through acquisitions, Chairman and Chief Executive Ralph Babb says.
April 16
Competition for large corporate loans is as intense as ever and, until it eases, Comerica (CMA) is content to let its middle-market lending drive profits.
The Dallas bank has intentionally pulled back from corporate lending over the last few quarters because it is unwilling to do battle with other banks that are loosening standards to win business, executives said Tuesday.
While total loans to midsize firms rose more than 9% in the second quarter from a year earlier, corporate loan balances fell 8% and are unlikely to increase until Comerica's loan officers get comfortable with the pricing and structure of the deals.
"Corporate banking is where we've seen the most competition. It's been very, very aggressive," Lars Anderson, the vice chairman of Comerica's business bank, told analysts in a conference call discussing second-quarter results. "And frankly, we're a company that is just not going to overreach. We are not going to trade off credit quality nor relationship pricing for volume."
For the quarter, Comerica reported a profit of $143 million, unchanged from the second quarter of 2012, as declines in both interest and noninterest income were offset by a decrease in problem loans and lower expenses. Its earnings per share rose 4% year over year, to 76 cents, beating by 6 cents the estimates of analysts polled by Bloomberg.
Terry McEvoy, an analyst with Oppenheimer & Co., says that Comerica is well-known for being disciplined in pricing and structuring deals, which is a key reason why it weathered the financial crisis better than many of its competitors.
The trade-off, he says, is that the $63.7 billion-asset Comerica is likely to "underperform" its peers over the next several quarters as it struggles with declining loan yields and a compressed net interest margin. Comerica's net interest margin was 2.83% in the second quarter, down 5 basis points from the prior quarter and 27 basis points from the second quarter of 2012.
While interest rates are on the rise, McEvoy says, Comerica is unlikely to see much benefit in the near term because, like most business-focused banks, it prices loans off the London interbank offered rate, which has barely budged of late. The company's returns on assets and equity have lagged those of its peers in recent quarters, and McEvoy says he expects the trend to continue for another six to eight quarters.
In late trading Tuesday, Comerica's stock was down 1.8% from Monday's closing price, to $40.83.
Scott Siefers, an analyst at Sandler O'Neill & Partners, says he believes the stock fell primarily because investors are wary of the thinning margins, though the recent run-up in bank stocks could account for some of the decline. Comerica's shares have risen nearly 30% this year, so some profit-taking is to be expected, Siefers says.
Comerica executives acknowledged that the steepening of the yield curve would not benefit the bank much in the near term, but said that Comerica's "asset-sensitive" balance sheet is well-positioned for an inevitable rise in short-term rates.
"Based on our historical experience and asset liability model, we believe a 200-basis-point increase in [rates] over a 1-year period, equivalent to 100 basis points on average, would result in more than a 10% increase in net interest income of approximately $185 million," Chief Financial Officer Karen Parkhill said on the conference call.
They were also somewhat upbeat about loan growth in its three primary markets Texas, Michigan and California noting that the pipeline of loans is at its highest level since the first quarter of 2012. In middle-market lending, the bank is seeing strong demand in energy and it continues to make inroads in the life sciences sector, opening new offices in Houston and New York.
And while rising rates have slowed demand for mortgage refinancings, the overall improvement in the housing market is boosting demand for purchase loans. A few quarters ago purchases made up just 30% of mortgage loans, Anderson said. In the first quarter that figure was at 50%, and in the second quarter it climbed to 60%.
"We have very strong relationships with some large national builders that are giving us some good volume," Anderson said. "And in addition to it,
