Comerica's Strategic Challenges: Managing Deposit Pressures and Contract Losses

Current State of Deposits

Comerica's collateralized deposits significantly decreased from $687 million to $281 million between December 2023 and March 2024. Additionally, interest-bearing deposits with banks dropped by $3.6 billion. Despite a competitive environment, Comerica leverages national businesses to attract deposits, with seasonal increases expected in the year's second half.

"Collateralized deposits, consisting of trust deposits as well as deposits of public entities and state and local government agencies, totaled $281 million at March 31, 2024, compared to $687 million at December 31, 2023. CRITICAL ACCOUNTING ESTIMATES" --- (CMA, sec filing, 2024/Q1)

"March 31, 2024 2023 Michigan 176 177 Texas 116 115 California 92 92 Other Markets 24 26 Total 408 410 FINANCIAL CONDITION First Quarter 2024 Compared to Fourth Quarter 2023 Period-End Balances Total assets decreased $6.4 billion to $79.4 billion, reflecting a $3.6 billion decrease in interest-bearing deposits with banks (primarily with the Federal Reserve Bank) and a $1.3 billion decrease in total loans, which included decreases of $498 million in National Dealer Services, $464 million in Equity Fund Services, $239 million in Mortgage Banker Finance and $222 million in Wealth Management, partially offset by an increase of $336 million in Commercial Real Estate." --- (CMA, sec filing, 2024/Q1)

"We also have a number of businesses that really are national businesses, like our TLS business, our Financial Services division, where we're able to attract customers and deposits in different ways that don't necessarily tie us to, let's say, CD rates in a small part of Texas, for example, we've got a lot of handles that we're able to pull. So, I totally agree with you, it's about as competitive as we've seen it in a long time, not just on deposits, really on loans and pricing and structure across the country right now has picked up a lot in the last quarter." --- (CMA, earning call, 2024/Q2)

"I will say that as many of you know, we often get seasonal deposits, both total deposits as well as non interest bearing in the second half of the year." --- (CMA, conference, 2024/06/11)

Managing Deposit Pressures

Comerica is managing deposit pressures by reducing brokered time deposits, which has led to a decline in average deposit balances. Despite cyclical pressures on noninterest-bearing balances, the bank aims to maintain a favorable deposit mix. This strategy, along with managing higher deposit pricing, impacts their net interest income outlook.

"Slide 6 highlights the stability of our deposit base. Average deposit balances declined $700 million, but almost $600 million was attributed to lowering brokered time deposits." --- (CMA, earning call, 2024/Q1)

"Although we anticipate some level of continued cyclical pressure on noninterest-bearing balances and ongoing success in winning new interest-bearing deposits, we expect to maintain a favorable deposit mix in the upper 30%s.The combination of noninterest-bearing deposit trends and lower average loans impacts our net interest income outlook, as we now project a 14% decline year-over-year." --- (CMA, earning call, 2024/Q2)

"And we think that's really a average of brokered deposits. And we think that's really a good step towards curing the overall balance sheet because it puts us down at a much more manageable level, really more modest level of broker deposits and it gives us capacity to pull that lever if we have to in the future." --- (CMA, conference, 2024/06/11)

"Our pipeline remains strong and supports our expectation for continued growth. Moving to Slide 6, average deposit balances declined $2.3 billion, but almost 70% of the decrease was attributed to lower brokered time deposits." --- (CMA, earning call, 2024/Q2)

"We expect continued decline in this portfolio over the coming quarters. Turning to Slide 9, net interest income decreased $36 million to $548 million, driven by lower loan balances and higher deposit pricing, partially offset by Fed deposits and lower wholesale funding." --- (CMA, earning call, 2024/Q1)

Impact of Contract Losses

Comerica's senior housing portfolio remains stable with no delinquencies or losses, and overall credit is strong with lower charge-offs and stable loan loss reserves. However, there are unrealized losses in average balances, indicating some financial impact from contract losses.

"It was very stable this quarter. We continue to experience no delinquencies and no losses in our senior housing portfolio, which was stressed because of rates, but also just the environment for housing coming out of COVID, is very elevated from a non-cash credit perspective, but is very stable at this point.So, not seeing any major cracks." --- (CMA, earning call, 2024/Q2)

"I heard you credit is strong or "really good shape". You had lower charge offs quarter-over-quarter, criticized loans are below historical, loan loss reserves are flat." --- (CMA, earning call, 2024/Q1)

"(c) Average balances included $2.9 billion and $3.4 billion of unrealized losses for the three months ended March 31, 2024 and December 31, 2023, respectively; yields calculated gross of these unrealized losses." --- (CMA, sec filing, 2024/Q1)

Competitive Landscape and Positioning

Comerica faces an intensifying competitive landscape from both traditional peers and non-banks, with no significant changes in the competitive environment recently. The company has strategically positioned its balance sheet to drive long-term value, regardless of rate fluctuations.

"And then separately, also on the -- on your NII commentary, you did mention the competitive landscape shifting." --- (USB, earning call, 2024/Q1)

"The competitive landscape for our businesses continues to intensify from traditional peers in areas like middle market and investment banking as well as non banks in areas like private credit." --- (JPM, Investor Day, 2024/05/20)

"It's pretty competitive. We're not seeing it move one way or the other in a significant way as you sort of look over the last quarter." --- (WFC, earning call, 2024/Q1)

"While the market remains focused on the timing and magnitude of rate cuts, we feel we have positioned our balance sheet to drive long-term value regardless of the rate environment.We appreciate your time this morning, and we'd be happy to take your questions. Question-and-Answer Session:" --- (CMA, earning call, 2024/Q2)

"So good performance, but still pretty modest. How are you thinking about the growth trajectory from here, I guess, as we think about, does it accelerate with rate cuts in your view?" --- (BAC, earning call, 2024/Q2)

Regulatory Environment Impact

Comerica faces a complex regulatory environment with different regulators for its bank and trust operations. The broader financial industry is experiencing significant regulatory changes, impacting strategy, capital allocation, and investor evaluations. These pressures could affect Comerica's ability to maintain stable loss rates and achieve financial returns.

"And looking forward, we expect loss rates to be relatively stable. Lastly, let's look at the changing regulatory environment. As you can see from the page, the industry is facing an onslaught of regulatory and potential legislative change." --- (JPM, event transcript, 2024/05/20)

"In the recent past, we have witnessed shareholders advocate for JPMorgan Chase, Mastercard, PayPal, Capital One and Charles Schwab to assess whether they have adequate safeguards to prevent 14 states' financial officers specifically called out JPMorgan Chase, which likely damaged their reputation and ability to operate in favorable regulatory environments. I encourage all shareholders to vote for shareholder" --- (WFC, event transcript, 2024/04/30)

"Well, we never talk about specific regulatory issues, but I will say that it's important to keep in mind, we have a different regulator for Comerica Bank and Trust than we do for Comerica Bank." --- (CMA, conference, 2024/06/11)

"But if this continues and you do continue to see this sort of regulatory push, How does that impact your strategy? How does that impact how you think about capital allocation and just the optimism generally about hitting your financial returns?" --- (JPM, event transcript, 2024/05/20)

"But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend." --- (WFC, earning call, 2024/Q1)