Comerica Incorporated (CMA) Earnings Call Transcript & Summary

Pleased to have Comerica next for a fireside chat. We have Jim Herzog, Chief Financial Officer; and Peter Sefzik, Chief Banking Officer. And Jim is going to start with some prepared comments, and then we'll get into Q&A and like all of these sessions, if any of you have questions in the audience, put your hand up and we'll get to you. Okay? So go ahead.

That's great. Well, good morning, Jon, thanks for hosting us, and good morning, everyone. The first thing I'd like to do is remind everyone, we did post a slide deck last night with our mid-quarter update. And then I would also point you to Slide 2 in the presentation deck for our safe harbor statement. We have some forward-looking statements there as well as some references to non-GAAP financial measures that are in the presentation. So with that, before we get into the detailed Q&A, we know everyone is very hyper focused on a number of topics for which we feel Comerica is very well positioned. But we thought it might make sense to take a step back and just look at the overall value proposition that we offer to our customers, and I would say, by extension, to our investors, that really starts out with strategy. I think most of you that know us know that our foundation is a commercial middle market bank for which we think we're best of breed, surrounded by a number of other commercial verticals and businesses and then complemented by strong retail and wealth capabilities. Something we're really proud of, and we view as a key advantage is our size. There's been a lot of talk about size of banks and what size the bank needs to be over the last year. We actually view our current size as a key strategic advantage. We've always been large enough to offer the most sophisticated products to our commercial customers. But I think a key differentiator is that we're small enough that our colleagues know where to go to get something done. And perhaps more importantly, our customers know who to call when they have a question and that includes calling people like Peter. When they have a question, they can call Curt Farmer, our CEO, that happens all the time. And I think that's something that's been overlooked over the last year. And it probably accounts more for customers than most people in the outside world realize. So we do think that's a key advantage. A lot of great strategic investments over the last year or two that we continue to focus on, enhancements in both management capabilities, payments, capital markets. We love these products because they do bring great capital efficient income to the bottom line and also really entrenches us more with our customers. So lots to be excited about from a strategy standpoint. And then the next thing you see up here is diversification, which I actually view as part of our strategy. I often say that we are a company of limits. We have limits in terms of size on our various businesses, our sub businesses, our credit structures, our geographies and a number of other variables. And I really view it as -- use the analogy of a personal stock portfolio. You want to be very diversified so that when unforeseen risks pop up, you can protect the investors and the colleague base. So feel really good about the diversification strategy. Earnings trajectory is something we've talked a lot about. Of course, some of that trajectory comes from the strategic investments I referenced just a minute ago. But we're also going to have some tailwinds over the next couple of years and beyond as it relates to the securities portfolio, the swap portfolio. And in the meanwhile, we're protected from rates going lower, which we think will happen at some point. So we do see some really strong tailwinds coming up over the next 2 or 3 years. Something that Comerica has always been known for is very strong liquidity and funding base. We're quite conservative in the way we approach that. We have the best and have had the best for some time, both pre and post regional banking crisis, the best noninterest-bearing deposit mix to total deposits of any of our peers. We love that because it obviously provides us some very efficient funding. But they're also very sticky deposits. They're operational deposits. They're very much cross-sold into our treasury management product suite. And so we feel that provides a key competitive advantage for us. On the liquidity side, we've always had great access to funding. I think we've proved that out again in late January, we had a $1 billion debt issuance, very well received. It was the largest in our history. The largest book that we've ever built, and I think the industry took note of some of the pricing that we got. So to me, that validated the confidence the outside world has in our funding profile and overall at Comerica. And by the way, a shout out to RBC, who was very instrumental in helping us with that bond issuance. So Vinnie and his team did a great job. Credit is something that it's been a hallmark of Comerica for some time. In recent quarters, we've had the best performance of our peers in terms of charge-offs. But if you look at our whole history, we've actually had a great history of charge-offs well better than peers, and that's something that we feel will continue into the future. From a reserve standpoint, we're very solid, even though we have very negligible charge-offs, we actually have a pretty strong reserve relative to peers, which we consider to be an appropriate reserve level. And then we know there's a lot of focus on real estate in the industry. And Peter and I can certainly take some detailed questions on that, but we feel very confident in our very selective strategy, selective in terms of our customers, selective in terms of the projects that we take on. We just feel like we're in very good shape from a real estate standpoint. And finally, regulatory preparedness. I've gotten more questions on this than I've ever gotten over the last few months for perhaps obvious reasons as we approach $100 billion. That is something that we feel we're very gracefully set up to cross over into $100 billion should that day come. I'll remind everyone, we've been in that regime before. We kept many of the practices. The practices that we dropped, we know how to rebuild again. And in fact, the ones that have a longer runway, we're already working on. And so I expect that to be somewhat of a nonevent if and when we cross that $100 billion threshold. So you put all this together, I step back, I look at our unique business model; I look at our tenured colleagues; I look at our coveted customer base; I look at what solid shape we're in with capital, credit, liquidity; and I think it just sets a great foundation for 2024, 2025 and beyond. So those are my opening comments. Thanks, Jon. And with that, we're ready to take any detailed questions you may have.

Okay. All right. Thank you. Thank you, Jim. So Peter, we'll go to you. Typically, we like to talk about the economy a little bit and I think you're the guy for the job to talk about what you're seeing. And then we can get into some of the drivers of loan growth as well, if you can touch on that.

Well, we're very fortunate. I mean if you look at the markets that we're in, as Jim mentioned, our diversification, we're in some of the best economies in the country. Obviously, we've got great market share in Michigan, but the prospects that you see in Texas and the Southeast are just really fantastic. And we're positioned really well there. We entered the Southeast about 18 months ago now and have exceeded our expectations of success. And I think that market continues to perform really, really well. It certainly seems like optimism has gotten better even than 6 months ago in talking to customers. I think that we're all wondering what -- how things are going to unfold and soft landing, et cetera, et cetera. But it certainly seems like things are a little bit better when you talk to customers. They're certainly concerned about managing inflation, but -- and trailing 12-month earnings, I mean, they're still making good money, maybe not as much money as they were a couple of years ago, but I think overall, they're performing really well. And so yes, the outlook on the economy, I think it is better than I would have expected, honestly, at this time 6 months ago. So it's encouraging to see. And I think part of that, too, again, is that we're in great markets.

Okay. You've talked about a 5% period-end loan growth rate. You talked a little bit about the various drivers of that. So how you feel about that number. I know you reiterated it, but.

Yes. 5% point to point, we feel very good about it. I would tell you that where we're really, really focused is in our general businesses. So Middle Market, Business Banking, Small Business, we've put a lot of energy into adding staff in those businesses. We get great connectivity, lots of deposits, treasury management, card, we're banking owner-managed businesses. Jim alluded to it. I mean our Middle Market, we feel like we are the best bank in the country in that space, absolutely. So we're adding RMs in Texas. We're adding RMs in the Southeast, adding RMs in California. And so everything we can do to stay really focused there. We'll do better than 5% at point-to-point in Middle Market and Business Banking this year. Our specialty businesses, which last year, we were very, very careful about, as you've heard many of the banks talk of sort of managing the balance sheet, that's where we really did it. We are now almost completely out of mortgage banking finance. We've probably got $20 million left in that space. We started that exit last May. But a lot of our other specialty businesses, I think we kind of dialed back and so the pipelines are building up as we get into this year. And I think in the second half of the year, we'll see some good growth. And particularly our Equity Fund Services business. Dealer continues to be a little unpredictable as far as floor plan and usage there, but we've seen some good results and are adding customers in that space. And then Commercial Real Estate, a lot of this is stuff that we booked already that's sort of funding up, it's construction type. It will probably stay flat throughout the year, and we'll see how that looks like going into the next couple of years. But I think Middle Market, Business Banking, Small Business, that is where we are very, very focused and where we have opportunities to add staff and capture market share.

Okay. Good. Good. Jim I don't know, I feel like we need to put you on like a psychiatry couch for the questions on the margin and what's happened over the last 12 months because -- happy anniversary, by the way, after all hell broke loose when our conference ended last week. It's been an interesting year for you. But give us an update on the guidance you provided. It seems pretty stable, but give us an update on the near-term guidance, what you're saying and then what you're seeing in some of the near-term deposit trends. I want to follow up with noninterest-bearing, but give us an update and talk about your guidance for a second.

Yes, net interest income, we did reaffirm our first quarter guidance. In fact, I think we've a shot at being more at the upper end of that. So quite comfortable with how things are progressing there. As you know, the full year guidance was based on the 12/31 curve, which had almost 6 rate cuts in it. The most recent curve that we've used has 3 rate cuts in it. And of course, the cuts have been delayed from March until July. So we do think that will push the trough for our noninterest income. I have been saying first quarter that will push it out to the second -- second quarter will likely be the trough at this point. And then as we start getting rate cuts in July, we'll certainly see some tailwinds there. We are just slightly liability sensitive right now, but I do think of it as largely being interest neutral. It's not a very big liability-sensitive position. It's always our intention to be maybe neutral to slightly asset sensitive, but some of the DDA runoff that we saw following the regional bank crisis, maybe tipped us a little bit from asset sensitive to liability sensitive, but again, mostly interest neutral. I think where the pressures will come from will be a, delayed rate cuts relative to previous guidance; and b, the longer we're higher for longer, you have the propensity for deposit rates to climb up very slowly. We're not seeing much movement there, but there will be a very slow creep up until you get to those rate cuts. And then we'll start to see some tailwinds from what we do with the deposit pay rates. So the long and short of that is even though we feel really good about our first quarter guidance, there probably will be a little bit of pressure on the full year guidance, and I think we'll be able to update that with the latest curve once we get into the earnings season in April.

So you're thinking 3 cuts now when you're...

Closer to 3. But really, we're just going with the curve and trying not to be emotional or too judgmental there. We just go with the curve, and we'll likely use a 3/31 curve as we offer full year guidance at the April earnings call.

Yes, not easy to be in your chair to guide for all this. I understand that.

A lot of variables for sure.

Yes. Okay. Noninterest-bearing trends. What are you seeing there?

Yes. Let me start out by saying, overall, we're really pleased on our deposit trends in general. I think most of you see that we're outperforming what we had provided in guidance in January. Most of that outperformance is actually coming on the interest-bearing side, which we're really pleased to see. And you'll note in the slide deck that we've actually paid down our broker deposits $0.5 billion within that interest-bearing category. So interest-bearing actually performing even better than you would think. It's about $1 billion better than what we had projected. Noninterest-bearing deposits, quite pleased with what I'm seeing there, progressing almost exactly as we had forecasted and guided. You're seeing mostly seasonal pressures in the first quarter, which we had alluded to in January. That's pretty typical for Comerica. And by the way, we guided the seasonal pressures that were a little less seasonal than what we've seen in some prior years. So we did moderate some of that seasonality and glad to see the actuals confirming what we'd thought. You do get a little bit of pressure still not a lot, but a little bit, the longer, again, you say higher for longer outside of seasonality as corporate treasurers continue to thread the needle a little bit. I think what I'm most encouraged about with noninterest-bearing deposits is that we were essentially flat the entire month of February. So we saw a lot of that seasonal runoff in the month of January. It's really stabilized in February, whether it stays stable and higher for longer, we'll wait and see. But it sure feels like we're very close to the trough. And even though I'm hesitant to call a trough on noninterest-bearing deposits, just because of the higher-for-longer phenomenon, the recent data does seem to support the fact that we've gotten to a pretty good resting place at this point. So overall, really encouraged about noninterest-bearing.

What's atypical February like? Is it typically up?

No, we continue -- our seasonality patterns, we are typically down in February, and we weren't down in February. So we were down in January about as much as we would normally expect to be. February, that trend usually continues even though it slows up, and we didn't see that trend continue in February. And then usually sometime in March, we see an inflection point and things really level out. So we may have gotten to that leveling out point a little bit earlier than normal. We'll have to wait and see. I don't want to declare victory too early. But overall, encouraged by the trends.

Okay. Okay. One of the topics on your call is liability sensitivity which you brought up. And I mentioned that I think I covered the company when Ralph was CFO. So it's been a while. And I don't ever remember that as part of your positioning. Talk a little bit about that. You said modestly liability sensitive. What are you trying to do? What are you trying to accomplish with your margin going forward?

Yes. It's always been a goal of Comerica to be roughly interest neutral even though when rates are at unusually low levels, we've been always a little bit slower to hedge. But it's always been our philosophy not to take too many risks on interest rate positioning. It's just we've had some very unusual events over the last couple of decades. Our philosophy is to be largely interest neutral. And again, I do view us as being largely interest neutral now. If you look at the slide deck, you just see a little bit of liability sensitivity there, depending on what deposit betas that you use. And if I had my druthers, I'd probably be slightly asset-sensitive on an ongoing basis just because of the asymmetry of where rates can go, even though ceiling on the high side, but always a floor on the low side. But again, some of the DDA runoff from the events last spring probably just tipped us a little bit more liability sensitive. Having said that, if you ever were going to be liability sensitive, this is the time to be it. So I'm actually quite comfortable with where we're at right now, and I think we're really well prepared for lower rates. And if rates don't go down, I think some of the pressure that we and other banks will see isn't so much from any very modest position that we've taken, it's more just a competitive landscape for deposits and to what extent those deposit rates may creep up slowly until the rate cuts start.

Okay. Okay. Higher for longer, what does that do to pricing on the asset side? Can you make it up?

Yes, I think you can make it up. I mean, I think eventually, though, it starts to be more challenging for the economy, interest rates running that long and higher for longer. So again, so far, so good on how, in general, credits have been performing. And -- but yes, I mean, I think that we are doing really good on pricing. And -- but it does come back to how disciplined you are about it. We're not going to try to necessarily capture market share on pricing. We're going to stay really, really disciplined in that. So.

Okay. Any more questions on margin or NII before we move on? Okay. We're satisfied.

Great.

Peter, fee income, opportunities to grow fee income. It's a decent component of your business. You made some recent investments and kind of talk about what you expect there.

Yes. So we've got really 3 buckets that we think about on fee income. So payments as a business, and we have made some investments. We've invested in leadership in that business, in product in that business, our sales force in payments, so all the way from what we deliver on the treasury management side, card, corporate card, merchant card and very, very focused on customer experience. I mean we continue to believe that we can really provide sort of a leading Commercial Bank experience in the payment space in the country. And so we're very focused on that business. I think we've got tremendous opportunity and we're seeing good results. And so -- so payments is sort of the one big one. The second would be our capital markets business and I just have always been terribly proud of what Comerica does in the space. I feel like we -- to Jim's point, we deliver big bank products and abilities, but from sort of a community bank experience and environment. So whether it's syndications or FX trading products, interest rate trading, and we now have an M&A group that we started about 18 months ago, which was not something we'd had. So we'll see that develop over the next few years, but we're adding staff in our capital markets business as well. So -- and then finally, our Wealth Management business is a fantastic noninterest income business for us. Again, I think our Wealth Management offering is it competes with any regional bank and certainly even bigger banks and nonbanks. We've got a great team. We've hired teams in Southern California. We're going to continue to look for opportunities in Texas and the Southeast to bring on Wealth Management folks. Our partnership with Ameriprise is really just starting. So we're now using their broker-dealer capabilities, which is a much better customer experience than what we've been providing in Comerica Securities before. And so I think you're going to see us start to add FAs across the country to support our banking centers and really take advantage of that. So those 3 buckets are ones that we're very focused on, adding talent, adding product and coverage in our markets.

Jim, just to fine-tune it, there's a little noise last quarter from the BSBY change, and you noted it in your deck. Can you just touch on that as well?

Yes, all that, for those that aren't familiar, relates to the cessation of BSBY, which Bloomberg announced. And just as a way of background, we had $7 billion of swaps attached to BSBY. We needed to redesignate those given the cessation of BSBY that was announced. We redesignated $4 billion of that $7 billion to essentially SOFR loans at the end of the fourth quarter. We had that net $88 million loss, which is just an accounting recognition phenomenon. We'll earn that $88 million back mostly in 2025 and 2026. So it is economically neutral. Because there were $3 billion of swaps, we had not redesignated and we plan on redesignating the vast majority of that in the first quarter. We have that $3 billion continuing to float with interest rates. Interest rates have obviously gone up since 12/31. So I would expect some type of smaller mark on that remaining $3 billion. And then that mark, of course, will be recognized mostly in noninterest income. That's where it manifests. And again, any type of mark that we might have will be earned back in later years, again, mostly in 2025 and 2026. So again, not an economic event, just an accounting recognition of earnings in terms of the timing. And of course, I don't think I have to say that was not part of the noninterest income guidance that we offered. I mean that was going to be volatile, 1 direction or the other. But we do expect, again, to have the vast majority of that $3 billion redesignated in the first quarter. We're not quite there yet. So we'll see that settle down quite a bit. And I just view that again as a timing event of recognition of earnings, not so much anything to do with the economics.

Okay. Fair enough. On expenses, you announced a plan to lower expense, that you've achieved that. Have you achieved that? Anything more to come from here?

Well, we did take some very important steps to reduce expenses. As everyone knows, I think we announced in the first quarter earnings $45 million of savings this year, growing to $55 million on an accumulated basis in 2025. Those were difficult decisions to make. We wish our colleagues that were impacted the best, and we tried to take care of them in the best possible way. But we have been very successful in terms of hitting those objectives. Everything is very much on track. To the extent we had nonbanking center-related expense reductions, I would expect to realize the bulk of that starting in the second quarter. All colleagues have been -- that were impacted have been communicated with at this point. Some have already exited the company. The rest, we expect to be mostly done by the end of the first quarter. So again, it will be the second quarter where you see the bulk of the nonbanking center closure of savings. And then related to banking centers, that will just be scattered throughout the second half of the year, depending on the timing, maybe late second quarter, but depending on the timing of when we can, a, close those banking centers and then b, sell the properties. So some of that will be scattered as we move through 2024. I do want to emphasize, though, I really view expense reduction as a journey, not a destination. We do need to continue to work on expenses for really several reasons. You want to make sure it's always calibrated to the revenue you have. Curt, Peter and I, we actually do want to see our ratios improve as it relates to things like efficiency ratio and operating leverage. So we do have some more work we need to do on an ongoing basis on expenses, and we're very committed to that. And then the truth is every dollar that you save in terms of efficiency initiatives, it gives you an extra dollar to invest in important product, innovations and technology. So we will continue to work on expenses. I think that's something that we'll just continue to have to be part of our DNA. So I don't think we're done yet. But for this particular wave, we are pretty much on a set path at this point.

Okay. Peter, anything on credit you'd like to note? I mean there seems to be like a difference between the outside view of the banking industry and what bankers are actually seeing. Touch on what you're seeing and anything you're concerned about.

Yes, I don't know that I would say there's anything I'm, per se, concerned about. I do think that as we've talked about on the calls, you're starting to see a little bit of migration, the spaces that we would see are leverage lending, which is a business that we have. We're not a private equity -- we don't have a private equity business per se, but we do leverage lending. And so you're seeing a little bit of creep there, I think, with interest rates. You always have some amount of credits you're watching. In our Technology and Life Sciences business for sure. And you are seeing some migration in Commercial Real Estate, all of which we feel very, very good about. We've seen a little bit of migration in our Corporate business and kind of what we call our health care senior living business. And so we're paying close attention to that as well. But overall, it continues to perform very well. I mean I think that to be expected, we would get -- we would start to see some migration back to historical normal levels. And it's been so good the last few years, though. And so that's something that we're just going to have to all navigate. But as far as anything I'm per se worried about, I don't know that we see that right now on the horizon.

Fair amount of visibility in terms of...

In the portfolio?

Yes.

Absolutely. Yes. I mean we -- the line and credit have an outstanding relationship. Melinda and I regularly talk about the portfolio. We dig deep in our projects. We look at it regularly. So I've got a lot of confidence. We've got visibility into what's going on. And we know where our hot points are that we need to pay attention to and we get the right people involved to make sure that we do what we need to do. But I would also say, Jon, I mean, we always perform really well through credit cycles. Comerica, part of what we are focused on is taking care of our customers through that. I mean, we want to get them to the other side of whatever we're dealing with. And just about every time I've been through this, we end up picking up market share, picking up customers, doing the right thing by them. And I think that that's the most important part of it is that we get to the other side. So credit challenges are not anything our customers want to go through either, and we're confident we're banking the right people and the right sponsors to get to the other side of it.

Okay. Okay. Jim, capital, the buyback. How are you thinking about capital? Do you want to restart the buyback at some point? And what would kind of be the levels you need to get to, to think about that?

Yes. Number one, we do think we're in great shape from a capital standpoint, obviously, with CET1 over 11%. We do think of capital from multiple perspectives because the multiple perspectives are very important to various constituents depending on who you're talking to. So I actually do pay attention to both our CET1 ratio, tangible common ratio. And of course, CET1 with AOCI, should we become a category 4 bank and should the Basel III end-game rules prevail as they were originally drafted. So we try to pay attention to all 3 of those and even though we're in great shape on CET1, I am mindful of our tangible common ratio, which some constituents do look at. In terms of the variables, returning the buyback back on, I'm probably most focused on AOCI and interest rates. We saw a nice step down in the loss position there on 12/31. Of course, when rates -- since then, rates have gone up a bit, and we'll see where they end up on March 31, but I do think it's a little too early to declare victory on the whole AOCI front. I think the overall curve would suggest and our maturities would suggest we're going to end up in very good shape. But we want to be cautious there because you just never know and capital isn't something you can change on a dime. And so for that reason, we continue to stay consistent in our theme that share buyback will be turned off for the first half of the year for sure. Even in the second half, I think we'll continue to be very cautious about it. We'll continue to prioritize our capital in terms of making sure we're there to support our customers, have the right capital ratio, support our very strong dividend, so in a sense, I feel like we're already returning a fair amount of capital just from the very strong dividend we have. And at some point in the future, I have no doubt share buyback will be turned back on, but the timing of that just remains to be seen. And I'll just summarize again by saying I think it pays to be cautious in this environment.

Okay. Can you handle talking about the $100 billion asset level in 1 minute and '19 seconds?

Yes. I'll just say I welcome that. Yes, as I mentioned in my opening remarks, I think that's actually a really good story for us. We're 1 of 2 banks that has been in the hands of prudential standards that are below $100 billion. The cutoff, as many of you know, used to be $50 billion. So we kept the practices that made sense. The ones that didn't provide business value, we dropped, but we know how to reinstate those. We've done it before, even though I'm sure the bar has gone up since then. The ones that have a longer runway, we're already working on. So I think it's going to be a very graceful step in and step over to $100 billion. It's not something that's going to change our strategy. I think these levels and limits the regulatory body set are fickle. They can depend on [indiscernible] administrations and you just don't want to set your strategy by that. So we're not going to grow faster than we would have to blow past $100 billion. We're not going to do an acquisition that doesn't make any sense. That's not on our radar. And we're not going to try to stay below $100 billion by design. We're going to do what the strategy dictates, and I think we'll be able to handle the $100 billion requirements, just fine.

Okay. Good. Well, we're out of time. I just want to thank you guys for being here. We appreciate it.

Thank you, Jon.

Good luck with the meetings here.

Thank you, Jon.

Thank you.

All right. Thank you.