Comerica Incorporated (CMA) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for being here, kicking off day 2 of our Annual Financial Institutions Conference. Hopefully, a little less dramatic day in the markets. We have like the calming influence of Comerica here. We have Jim Herzog, the Chief Financial Officer; Peter Sefzik, the Chief Banking Officer. They're going to make a few opening comments, and then we'll get into Q&A. And as always, we're open to questions from the audience as well. If you have a question, put your hand up and we'll get a microphone to you.

Great. Well, good morning, Jon, and thanks for hosting us. We do appreciate the opportunity to talk about how the quarter is going. And I'll go right to the chase. The quarter is going very good, very aligned with our expectations, and we're excited about the great start to the year, and I'm looking forward to the rest of the year also. We did publish a slide deck last night. In that slide deck, we did have a safe harbor statement with the forward-looking statement and non-GAAP financial measures. So be aware that applies to the entirety of this webcast. So with all that said, I just want to spend a couple of minutes talking about some of the underlying strengths of Comerica, some tailwinds that we see for '25 and then Peter is going to talk about some of the revenue strategies that we're putting in place. We do think it continues to be a very compelling story for Comerica. It always starts with those core strengths and I always like to lead off with credit. In the fourth quarter, we were once again in the top quartile peers in terms of net charge-offs. And it's been a pretty consistent story for several years now. So continue to be very proud of the credit heritage capital with almost 12% in CET1 provides a great runway for providing for growth and we think it will allow us to continue the share repurchase and probably increase that share repurchase as time goes on. And then finally, liquidity. We were reminded of how important liquidity is during the spring of 2023. We felt like we had very strong liquidity then, and it's only gotten stronger since then. Now with all that said, building on those core foundational strengths, we do see some great tailwinds for 2025. It starts with our maturing swaps and securities, which will benefit net interest income. And that's a gift that we'll keep on giving each year, even beyond 2025. Great core customer deposit base. We've had some great recent success over the last several quarters. We expect that to continue through the rest of this year. And I think we all know deposits -- core customer deposits for the best way to efficiently fund loan growth. And we do expect some good point-to-point loan growth which will be a tailwind to net interest income also. And then we do believe the most powerful lever we have for improving financial results is to grow revenue at an annual compounded rate. And with that, we're going to start talking about some of our revenue strategies as we move through the year. And Peter is going to kick that off this morning. So I'll turn it over to Peter for those comments.

Yes. Thanks, Jim. So good morning, everyone. Thanks, Jon, for having us. So we thought on a go-forward basis, we would try to start double clicking down in a few of our businesses for you all. So the slide here that we're showing just gives you an idea of kind of what we think that looks like. We've historically talked about the Commercial Bank, Wealth Management and Retail as kind of 3 major divisions. But really underneath that, we kind of -- we have other ways that we break that out. And so today, I'm going to talk a little bit more about Middle Market and Business Banking as well as our Small Business operations. And then on conferences going forward, we'll probably look further at some of these other businesses and try to give you guys a little more insight into what we're doing in each one of these throughout the year. So specifically on Middle Market and Business Banking, this is at the core of what Comerica has done for 175 years really. So we are a fantastic general lender, if you will. So across the country, businesses that make things, manufacture things. This is our Middle Market and Business Banking business. And it really is a people game. It's people, places and investment in product. And we are very, very fortunate, we have a fantastic training program that the last couple of years, we have really started to lean into as a growth engine for increasing our RM population across the country. We have found over the years that growing our own is the best way to increase our sales force. We've had good luck hiring from the outside, but we don't think it's the best way to necessarily do it. So on a go-forward basis, we envision hopefully being able to add 70 bankers at least out of our training program over the next 5 years. And in addition to the extent that we can capture opportunities from other banks, we will do that. But we think that bringing in our own talent, training them, teaching them credit, which, as Jim mentioned, is one of our real strong strengths, teaching themselves and someone like myself, Melinda Chausse, we are people who came up through that program, and we want to really invest in that on a go-forward basis. And then putting them in the right places. So hopefully, you all have a good sense of our geographic footprint. But when we talk about Middle Market and Business Banking, the states you see are where we have loan -- we have either loan offices, loan production offices or we have all of our business lines. So you've heard us talk about Michigan, Texas, California. We now have Middle Market and Business Banking lending in the Southeast. We have it in Denver. We have it in Phoenix and those markets. And so when you look geographically, Michigan has always been a fantastic base for us but we're in the right markets on a long-term basis where the growth is going to be. We've proven our ability to do that in the Southeast. So just in the last few years, we've added a number of folks in our Southeast market and are really, really seeing fantastic results down there. I would tell you that's kind of the first time Comerica had really engaged in attempting to go to a brand-new market or take on the number of RMs and leaders that we did really since I've been at the bank. And now that we've kind of seen the success and what that looks like, we actually intend to take that even stronger in the markets where we already are, so Houston, San Diego, L.A., even Dallas is an opportunity for us, where we're about half the size in DFW as we are in the entire Metro Detroit area. So that gives you a sense of the number of folks that we could add to those markets and be really successful. And then finally, just investment in our products and our offerings. I mean in today's day and age, it's about onboarding how quickly you can set up customers with their treasury management, how quickly you can get their packages approved, take care of them digitally and so forth. And so we're going to continue to invest in that side of the business, which is kind of just something you have to do in today's world to be successful in Middle Market and Business Banking, but I think you put all those 3 things together, we feel really good about the growth outlook over the next 5 years. The other business we don't talk very much about is our Small Business offering. So for a long, long time since I've been at the bank, we were kind of good at Small Business just because we had banking centers. Over the last 2 or 3 years, we have now hired 100 people in our Small Business relationship management pool to go out and attract business. So when you look at our retail deposit base, call it, $25 billion, $5 billion of that is Small Business. non-interest-bearing deposits, super granular. We've been able to grow to that number without, like I said, really going out in marketing. We had great success last year. We did better than the industry, average on deposit retention and growth. And we feel like this is a business that we can grow 10% on a deposit basis, year in, year out. And again, we're in the right markets to do that. We're starting to get third-party opinions that we're doing a good job with this. We feel like we're providing some creative product, we have a co-work offering in our Dallas market, where our Small Business customers can use our space for their businesses. And we're going to continue to lean into this. Small businesses become big businesses, and so to the extent that we can have a much better inventory at small businesses grow into business banking, grow in the Middle Market. That's not something that we've really had in the past before, and we feel like that's something that's going to take us forward for a lot of years to come. So you'll continue to see us invest in this. We probably aren't going to add as many people in Small Business. We feel like we've got the right headcount now. But we are going to invest in product and offering and certainly do what we can to increase that experience for our customers. So that's just a little bit of a double click into it. I know we'll see many of you all throughout the day and can answer any other questions. But Jon, be glad to take any questions you have. We'll take it here on the stage.

Appreciate that. Peter, maybe for you, just the macro environment will start out since it's very topical. Any early customer response to the tariffs, and you guys have obviously a pretty good read in Middle Market Banking. I'm curious if you think it's going to have any impact on your outlook?

I don't think it's going to have any impact on the outlook. I certainly think it has a lot of impact on day-to-day conversations and decisions. So at a high level, I would say we're not seeing that it's necessarily going to impact our outlook on a 2025 basis. I do continue to think though that we ended last year, we had our fourth quarter call, I felt like things had gotten a little better with customer sentiment, customer optimism. In the last 60 days, it's probably dialed back a little bit. from that. And I would just say it's confusion. What exactly are the rules going to be? And most business owners can adjust to regulatory changes, to tariff changes. We've seen that over the years. They just need to get clarity about what the rules are going to be. And I suspect that we will start to get that here hopefully, in the next 30 to 60 days. Once businesses, I think, get that clarity, they tend to move forward. But it's hard to imagine that there isn't some impact overall GDP-wise for the country that we're going to experience. I do believe on a customer-by-customer basis, what we tend to hear from our customers is they will navigate this. I'm not worried about it from a credit standpoint. I continue to think -- we went through a period there where margins got really, really good for Middle Market customers, and they've kind of shrunk a little bit with interest rates. They're probably going to shrink some with tariffs but they're going to continue to perform and they're going to continue to run their businesses as they have in the past. So we may see some sectors that get more impacted than others, but we've been through this drill a couple of times, and that's usually what ends up happening on the other side of it. So a lot to be determined, but I suspect when we get our sentiment feedback from our leaders here for Q1, it's going to be a notch below where it was at the end of Q4.

Okay. And then just on loan growth in general, this is kind of -- that's kind of the near-term stuff, the near-term noise. What kind of expectations do you have? I know that you put up some pretty strong CAGR objectives for Middle Markets and Small Business, but you also have some CRE paydowns. Just talk about kind of the balancing act and what expectation.

Yes, it is a balancing act. And probably one of the things that I would say is that what we are trying to solve for is sort of giving more consistent loan growth year in, year out, but navigating these businesses that have these big swings. So that's why I don't miss the Mortgage Banking Finance business. That was a very big swing business quarter-by-quarter for us. Dealer and CRE. Dealer tends to be a swing business and CRE tends to be sort of an annual year in, year out, something you have to navigate against. So I don't think, again, we're making any comments or changes about our outlook. CRE it was picking up a little bit, all of a sudden, it's kind of slowed down again. So we'll see what happens as we go throughout the year. But those are the 2 businesses that would be headwinds for us from just a high level standpoint. The rest of our businesses we would expect to see growth, and we would expect to see it on an annualized basis, be able to offset what we think we're going to see from headwinds from CRE.

Okay. Good. Seasonality in Q1 looks normal. Your guide looks consistent. So Jim, for you, just talk a little bit about deposit trends and what kind of expectations you have there seems the guidance seems consistent but any nuances you want to share?

Yes. We continue to be really pleased with what we see in the deposit side. A lot of success, as I mentioned earlier, in terms of gathering core customer deposits. The outlook is still strong on a point-to-point basis. I think that really speaks well to the confidence our customers have in us, the product set, really the overall relationship banking model that we have. So we continue to expect those to grow during 2025. We did indicate on the January call that we expect our typical seasonal outflows in January, February, March. I would say that what we're seeing is very much in line with what we expected, so tracking very well. Noninterest-bearing is part of that, probably at or slightly better than what we expected. We did talk about noninterest-bearing deposits on the January earnings call, thinking that they bottomed out in terms of this mix shift between noninterest-bearing and interest-bearing, it looks like that's holding up okay. We haven't seen any material shifting occurred during the quarter. Now it's only been 2 months, and we've had other 2-month periods where it slowed up and then the rate curve shifted up and we saw a little bit more. But at this point, we're still holding to our earlier guidance that we think, overall, the mix shift has bottomed out and we think noninterest-bearing will kind of hold at this floor and then continue to grow modestly as we go through 2025. On the pricing side, good news there also things continue to track very much as expected. You might recall that in the up part of the cycle over the last couple of years, we had just over a 60% deposit beta. And we do expect overall symmetry with our current customer base as we come down the rate curve on the side of the cycle. And you might recall in the fourth quarter earnings call, we showed that we probably had just a little bit over a 60% beta on the downside since the rate -- Fed started cutting rates on third quarter average versus fourth quarter average. So really exceeding that overall up beta that we had received. And what I'm seeing through the first 2 months of the year is we've actually probably improved upon that a little bit. Now we do expect that symmetry to exist over the course of the down cycle. So we may have to give a little bit of that rate back to the customers as we move through 2025, just not totally clear at this point. But at this point, we're really probably slightly outpacing what we might have thought just a few months ago. So pricing really moving very well and really as designed.

Okay. Good. And I want to ask about Direct Express, Peter. But Jim, just maybe one question for you. You've taken a more asset, call it, neutral position versus your historical asset sensitivity. How do you expect that to progress over time? Do you expect to become more asset-sensitive over time? Or is this the future of the company to be more neutral from a rate perspective?

We are -- I do consider us mostly neutral at this point. And I think typically, going forward in the future, I think over the course of the cycle, we'll be roughly neutral. That would be our goal. Having said that, I'd probably put a couple of little caveats on that. The first is just based on what I see going on in the outside world, not just recently, but really over the last year, or a couple of years. I do think that we're probably in for a wider range of interest rates than we might have thought just a couple of years ago. The world is no longer flat. As Thomas Freeman might have said a few years ago. So we need to be prepared for that wider range of interest rates. We've got to be cognizant of the balance sheet, too, with Basel III end game probably coming our way and AOCI being part of the CET1, so we have to manage not only interest rate risk on the earnings side, but on the balance sheet side, too. And those 2 are not always congruent with each other, depending on the time horizon that you have. So all that to say, we'll probably have to be a little more comfortable with having some asset sensitivity earlier in the cycle, at the lower end of the rate curve and then kind of cover that position as we start to see rates move up. But over the course of the cycle, I would say, much closer to interest neutral.

Okay. Good. Peter, for you, just Direct Express. Can you give us an update on Direct Express, maybe lessons learned on that? And any impact to other areas of your business?

Lessons learned. That's -- I haven't been asked for that one yet. Yes, there's probably a few lessons learned. I don't know that I'll go into that from here. But there is no real update as far as the deposits or the outlook. What we've told you guys on a go-forward basis is kind of where we sit at the moment. As you all are probably fully aware, there have been a number of changes at fiscal service in the last 60, 90 days, which, quite candidly, is sort of pushed out. Any clarity about what any transition plan does or doesn't look like. So we're still working with them on those plans. But what that means for us, therefore, is that the deposit outlook is consistent with what we've said in the past that we don't really -- we don't see any changes to 2025 in those balances. And really, at this point, not into '26 and '27 and I think as you all know, they've extended us for 3 years. And so we think those balances are going to hang in there for quite a while. I would say, though, that there's a tremendous amount of things that we learned about that program that we are deploying as far as technology and solutions and a lot of what we do with Direct Express is actually applicable to some of the things that we could do for some of our Commercial customers. And so we're switching gears, if you will, and taking those learnings and making sure that we figure out how to go out and gather deposits in different ways. Granularity matters tremendously obviously. And so we're very focused on making sure that we have solutions to offset the deposit loss that we expect to see in 3 years. And I'm very confident we will get that done. But I don't have any updates about the transition for right now.

Okay. Jim, for you, you have some net interest income momentum, I would say, you have the busy tailwinds, but it seems like you also have it at your core. Can you talk a little bit about some of the core expectations? And what kind of a rate environment you have embedded in that?

Yes, we did use the rate curve from 12/31, and the curve may have shifted up just slightly since then, but not materially different. Yes, we're really pleased with the outlook we were able to give on net interest income being up 6% to 7% on a full year to full year basis. About half of that being the [ biz b ] income and we've been very transparent that we don't consider that to be core income. So we want to be very upfront with that. But you still have about 3.5% of core net interest income growth on a year-to-year basis. I think that's really impressive when you consider that it's really the averages on the balance sheet to drive income. And while we have some really nice point-to-point growth plan this year for both deposits and loans, because we're coming off from such a low point at the end of '24, the averages aren't moving a lot, as you saw in the guidance, 0.5% to 1% on both loans and deposits. So even with that, somewhat modest average growth. And I do expect the averages to match the point to point as we move into '26 and have some nice healthy growth. But even with that modest average growth, to grow the balance sheet, 3.5% or net interest income, 3.5% or so exclusive [ biz b ] pretty impressive. And how do we do that? Of course, one of the drivers is the maturing swaps and securities. I would also say, though, that we've done a really good job with managing deposit pay rates, and that's providing somewhat of a tailwind also. And then finally, the overall balance sheet, the funding side and the right side of the balance sheet, just much more efficient in 2025. We've paid down the brokered CDs, some wholesale funding has been allowed to mature. Funding our loans, has really become more of a strategy of using core customer deposits to fund that loan growth. So those 3 factors combined really are giving us a nice boost on net interest income. I would expect some of those factors like the core customer deposits and the maturing swaps and securities to continue even in '26 and beyond. And then of course, as the averages for loans and deposits catch up to the nice point-to-point growth. I think we're going to see some really positive tailwinds as we go through time for net interest income. So really optimistic about that.

Okay. Good. Peter, how about fee income, you've highlighted it a little bit. It's a focus your mid-single-digit 4-ish percent projection for the year. What are some of the drivers of that? And what kind of longer-term expectations do you have?

Yes. And as I mentioned at the beginning, we're going to try to give you guys a little more look into each of those businesses as we go throughout the year. But the 3 buckets that we tend to talk about would be our capital markets business, our Wealth Management business and payments. So Wealth Management, I feel like we have a fantastic offering there. We've got a full suite of products available to Wealth Management customers. And probably the most -- the thing I'm most excited about in that business is what we're doing with Comerica Financial Advisers, which is sort of our retail brokerage offering, if you will. We did a major change over the last couple of years with how we deliver that offering and have substantially improved the customer experience with our partnership with Ameriprise. And for a lot of years, that business was not really moving and not really growing, but we have a huge opportunity to grow that business on a go-forward basis. So we'll talk more about that in coming conferences throughout the year. But adding FAs in our Wealth Management business is something that we're giving a lot of thought to and throughout the country, to the extent we continue to grow Middle Market and Business Banking that's going to create Wealth Management opportunities for us. So on the capital markets side, I mean, we've got everything that a regional bank needs, frankly, we kind of play above our weight in this business when it comes to syndicating loans, when it comes to providing interest rate commodity hedging for our customers. We now have an M&A offering that we did not have. That's only about 2 years old and it's starting to get some traction. So we think that is a real addition to what we do in capital markets that will help us go forward. And then on the payment side, the things that we're doing there, we think are terribly exciting for us. We've hired new leadership. We're bringing in new product leaders. We are investing in the technology, in the onboarding, there's a few headwinds in there when it comes to some of the things going on with card and things like that. But I think at a high top-level basis, we feel like over the next 5 years, our payments business is a huge opportunity for us. And I continue to believe that's going to become what a lot of middle-market CFOs make decisions about when it comes to loans is how good is your treasury management payments offering, and then we'll talk to you about a loan. So I think it's important that we continue to invest in. So those are our 3 big buckets when it comes to noninterest income.

Okay. Good. Jim, for you, this is kind of an expense strategic regulatory question, I'll roll into one. How do you think about your asset size where you are right now? You have $100 billion in assets kind of above you. You have to make some investments there. At your asset size, do you feel like you're competitive enough? And what kind of investments do you have to make to get over $100 billion?

Yes. We've always felt we're in a nice sweet spot here. So we actually welcome the size that we're at, being a relationship-based bank. We think it actually plays to our strengths. And I'm sure Peter could go on and on about the stories we hear from customers, where they were bigger banks and the relationship managers are switching over or they don't know where to go to get something done. That is not the case with Comerica. So we think it actually plays very well into our overall relationship model that we have and quite comfortable in our size. And if there's any bank that can get by with not achieving scale, I would say it's Comerica we feel quite comfortable with it, and we think it's actually a strategic advantage. Now we do recognize that there are some regulatory requirements as we get closer to $100 billion, and we're taking steps to address that. And we're 1 of 2 banks today that were in the regime back when it was a $50 to -- above $50 billion requirement. So we actually kept some of those practices. We sudden said others, and we're rebuilding what we have to rebuild, but we know how to do it. We've been there before. And where the regulatory regime goes over the next couple of years, we'll wait and see, but we're not going to change course from the path that we're on. We know that some of the things you have to do to get ready, take some time, and we don't want to start and stop there. So we feel really good about the progress that we're making and feel like the size we're at works well for us, works for our customers, but also very confident we can meet any requirements that are required for Category 4.

On capital, you referenced your 12% CET1 ratio, and that's healthy amount of capital given your risk profile. What do you want the message to be on buybacks? And then I also think we should talk about M&A as well. Do you have any interest in M&A as a use for some of that capital?

Well, the first use of capital is always for us is being there for our customers and loan growth. And it is interesting. I've gotten surprisingly some pickup in question slightly about if the tenure were to keep going up and of course, it's come down recently. But at some point, will that restrict the ability to provide capital for loan growth, and our very firm answer to that is no, that we think we have plenty of capital for loan growth even if Basel III endgame were to kick in, and the 10-year were to go up another step up from where it had been. So certainly there for loan growth. But in terms of returning capital to shareholders, we obviously have a very strong dividend. We are proud of restarting the buyback program at $100 million in the fourth quarter. We did take it down in the first quarter just because as we move through the end of fourth quarter of '24 early '25. The 10-year just went on a tear as you know. And so I think it was very prudent to maybe slow up that share buyback a little bit just to make sure that we had that capital there in case loan growth were really take off in a very strong way over the next 2 or 3 years. We do think that the 10 years, it looks like it's a little more behaved. I think under any conditions, we are prepared to probably keep some degree of share buyback going in 2025. But I actually do think we also have the capability to increase that return of capital as we move through 2025. So I think we can get the best of all worlds there and feel like we're in pretty good shape from a capital standpoint. As far as M&A, that's a low priority for us. We really believe in our business model, as I was mentioning. And we'd rather invest that capital into our business model, which we actually think is pretty unique and the best in the industry as opposed to buying someone else's business. And also you have that distraction factor also when you go through M&A. Having said that, you never say never. We have acquired in the past. And if you ever come across that very perfect storm of the right price, the right culture, the right markets, the right strategic fit. It's something you'd have to consider. But I will say it's low on the priority list right now. We are very focused on organic growth.

It's been kind of interesting on M&A because everybody is excited about it. But I think the theme has been there, there are a lot of potential buyers, but not a lot of potential sellers is what it feels like to me.

It feels that way, and it's just the opposite 2 years ago. So you never know where the sentiment is going to go. But yes, I think there are a lot of banks. You never know what they're thinking inside their head, but I think for Comerica, we've been pretty consistent. We like our business model, and we like the concept of organic growth.

Okay. Just 1.5 minutes left if anybody has anything? Okay, Peter, anything on credit. Any credit pressures, anything you're concerned about or thinking about at this point?

Yes. I'm concerned about credit all the time. I've described that as something that sort of way right now out there on the horizon that we know is coming. I don't know when. I don't think any bank can tell you when. We continue to see the math perform pretty well. Melinda answered that question on the fourth quarter call and the word that we keep trying to use with everyone is normalization. And in our slide deck, we show you the businesses that we watch closely when it comes to auto leveraged some of those businesses. But so far, so good. It continues to be performing very well. But in the back of my head, I always have this sort of belief that there will be a time, right? And what I tell people is Comerica usually comes through those really, really well because we have such good relationships with our customers. We have been through a lot of things with our customers, and you don't bank companies for 3 or 4 generations without them having been through really, really difficult times, and we've helped them get through those. So I don't see anything right now that concerns me, but it's also something that we constantly have our eye on as a company because I think it is, as Jim mentioned, one of our major strengths over a long period of time that's helped us be very, very successful.

Okay. That's it. We're out of time. But thanks, guys, for being here.