Comerica Inc (CMA) 2002 Q1 法說會逐字稿

Good morning, my name is

and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Comerica first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and the a number one on your telephone keypads, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you.

you may begin your conference.

Good morning. This is

from Investor Relations at Comerica. I'm here with

, the President and CEO to review the earnings for the first quarter of 2002. But before we get started, I would like to remind you that this conference call contains forward-looking statements, and in that regard you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. I refer you to the safe harbor statement contained in the earnings release issued today, which I incorporate by reference, as well as our filings with the FCC, including our recently filed annual report and form 10K. I will now turn the call over the

.

Thank you

and good morning. Today we reported first quarter net income of $214,000,000 or $1.20 per share, which was in line with our expectations. Looking first at the balance sheet, average loans were flat compared to the fourth quarter, as anticipated, and up less than one percent compared to the first quarter of last year. Our customers remain cautious about the anticipated upturn in the economy. In terms of business loans on a geographic basis, Texas loan volume was up slightly over the fourth quarter, Michigan and the national businesses were flat, and in California loans contracted modestly compared to the fourth quarter.

On

of business, national dealers showed the strongest growth with a seven percent increase, while growth in asset-based commercial real estate, small business, private banking, ranged between two and four percent. Technology and life science loans were down four percent, as that segment continues to be challenged in the current economic environment. Middle market and large corporate were both down three to four percent. Non-performing assets, a lagging indicator of the economy, were up six percent from the fourth quarter at $667,000,000 or one point six four percent of loans and foreclosed assets.

During the quarter, one non-performing loan totaling $5,000,000 was sold at a slight gain. In aggregate, our non-performing assets have typically been charged down to approximately 75 percent of the original contractual value. Net charge offs for the quarter were $60,000,000 or 58 basis points, relatively flat compared to last quarter. Seventy percent of the charge offs were in Michigan, the national businesses and international, with the remaining 30 percent in California.

By

of business, middle market accounted for 50 percent of the charge offs, large corporate 17 percent, national business finance 11 percent, technology and life sciences eight percent, entertainment was seven percent, and international was six percent. By geography, non-performing loan percentages were in line with charge off percentages. By industry, entertainment represents 12 percent of non-performing loans, retailing nine percent, technology eight percent and automotive and steel processors are seven percent each.

credits over $10,000,000 were added to non-performing during the quarter. The largest credit totaled $45,000,000 and was in the retail industry.

Approximately 37 percent of non-performing loans are shared national credits, versus 20 percent of the total loan portfolio. Reserve for loan losses is $670,000,000, up $15,000,000 from the end of the fourth quarter. As a percentage of loans the reserve increased to one point six four percent, from one point five nine percent at the end of last quarter, consistent with our ongoing review of the loan portfolio. Based on our current forecast of the portfolio and the economy we expect non-performing assets to be in the range of 150 to 180 basis points, and full year charge offs to be in the 50 to 60 basis point range, up from a previous guidance of 40 to 50 basis points for the remainder of 2002.

Because there have been many inquiries about our exposure to Argentina, I thought I would spend a few moments reviewing that portfolio. Our strategy in Argentina has been to focus primarily on trade finance and foreign direct investment of well-rated U.S. and international companies that establish a presence in Argentina. We also work with financial institutions to facilitate trade finance, lending and correspondent banking. We work with those entities which we believe should perform relatively well in an environment of currency depreciation. Nevertheless, the economic and political environment is very difficult, and our customers have been affected.

Our total exposure to Argentina is $156,000,000 and consists of $25,000,000 of securities, $112,000,000 of loans, and $19,000,000 of unfounded letters of credit. This exposure is down 29 percent from December 31, evidence of foreign companies supporting their subsidiaries. $5,000,000 of Argentine loans are included in non-performing loans as of March 31, and approximately $1,000,000 of Argentine loans are charged off in the first quarter. We continue to monitor the situation closely.

Looking at deposits, growth on average is up seven percent over the first quarter of last year, and down two percent from the fourth quarter. Title and escrow deposits in our financial services division drove the majority of the growth compared to last year. These deposits have stabilized as long-term interest rates have begun to rise.

Moving to the income statement, the net interest margin rose to four point seven seven percent, from four point six four percent last quarter and four point five five percent in the first quarter of last year. The combination of aggressive management of poor deposit rates increased loan spreads and our

strategy which targets stability of net interest income, resulted in a five percent increase in net interest income over first quarter last year, despite less than one percent growth in earning assets. To the degree earning asset growth accelerates in the future, there will likely be a gradual decline in the net interest margin with a positive impact on net interest income.

Non-market related income which include service charges, commercial lending fees and other credit fees is up eight percent over first quarter of last year. Compared to fourth quarter these fees and aggregate are down eight percent because commercial lending fees typically peak in the fourth quarter and the economic slow down impacted letter of credit income in the first quarter of 2002.

income is down slightly, less than one percent compared to last quarter and down three percent from the same quarter last year due to market declines.

Investment advisory fees are down five percent from the fourth quarter and down 39 percent from first quarter last year, excluding the first quarter impairment charge in 2001 due primarily to the continued - the continued decline in technology stocks. Preliminarily, assets under management

capital management totaled $33,000,000,000 at March 31, versus $35,000,000,000 at December 31, and $36,000,000,000 at March 31 of 2001.

Non-interest expenses were flat compared to the fourth quarter after adjusting for goodwill amortization and restructuring charges. Our 45 percent efficiency ratio for the quarter is evidence of our cost controls.

We used excess capital to purchase 1,600,000 shares during the first quarter. Our remaining authority for the stock repurchase program is approximately 7,000,000 shares. We continue to target tier one common equity to be in the range of seven percent. On March 31, tier one common equity was seven point five percent on a preliminary basis.

Now I would like to discuss our current economic outlook. We continue to look for an accelerating expansion over the next six to twelve months with an average real GDP growth of two point six percent in calendar 2002. This expansion is more than double the one point two percent pace in 2001, but substantially below the four point one percent rate in 2000. This environment should lead to declining unemployment rates and monetary tightening by the federal reserve in the second half of 2002. On the automotive front, light vehicle sales in calendar year 2002 are projected at 15,500,000 units, down 600,000 or four percent from 2001, but still a strong year. Although Michigan's economy when adjusted for inflation contracted by two point three percent in 2001, real expansion in the state is expected to be between four and five percent this year.

In Texas, the second half of 2001 marked the slowest period of business activity in a dozen years, however it renewed Mexican economic expansion, firm oil prices, and the ongoing defense build up should provide a general up look to the local economy. In California there is a sharp contrast between the north and the south. Northern California's weighted average unemployment rose to six point seven percent in February, verses five point seven percent for the U.S. Trends weakened as office and commercial - commercial vacancy rates increased. Housing prices also weakened. On a positive note, improvements in computer and related product orders and prices so far this year point toward a turn around. Southern California's unemployment rate in February was five point three percent and the housing prices

has been in the double digits.

Current risks include slower economic recovery than expected, non-economic shock to consumer confidence and international instability as in the Mid-East or Argentina. Based on the projected economic scenario and subject to the risks I've just outlined, we express - expect full year earnings to be in the range of 490 to 505 with minimal earning asset growth in the second quarter and accelerating growth in the second half of the year.

Now I would be happy to answer any questions you might have.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Please hold for your first question.

Your first question comes from

with

.

Good morning,

.

Hi good morning. Thanks very much for the phone call. I have one quick question. I saw you about a month and a half ago out in California. I was under the impression that Comerica was seeing an

in loan demands and it looks like it's not necessarily materializing at this point and is that different that what we had talked about and you know, I guess do you expect it now to be

kind of a second half story?

Well I think

, that's been where we've expected it all along to be earning asset growth in the first half of the year to be relatively flat. And I think on a

basis when we see where other institutions are, that should fare pretty well. I think we've always expected that the second half will be where the pick up will come.

OK. And then can you just kind of go through and develop a little bit more this new charge off policy and what is making you raise it ten basis points? Is it a few credits, or kind of a general deterioration?

It - it on the guidance or the estimate that you're speaking of, we - if you will remember the original estimate was 50 to 60 basis points in the first half of the year and then averaging down to 40 to 50 basis points for the whole year.

OK.

And because of the - because of two things, we expect charge offs to be up slightly, but more importantly because of the slowness in the loan growth the denominator is likely to be less than what we had thought.

OK.

OK.

Thanks for your question.

Thank you. operator: Again I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. We'll pause for just a moment to compound the Q and A roster.

You're next question comes from

with Capital Management.

Good morning, gentlemen.

Good morning.

On what's going on in Argentina, is that a strategy to slowly exit that, or is that, you've got it down to a level where you think you can maintain it and it's gonna stay there, I mean - I - forgive me if I don't know all the specifics, but it sounds like mostly what you're dealing with are companies that are not necessarily Argentinean in originality.

About 75 percent of the - the companies we lend to have some foreign ownership.

Uh huh.

And therefore we've followed many times our customer base in either other countries...

Right...

Or the U.S. down there. We would expect that exposure over time to decline in the current environment.

OK. And if I can ask another question, are you seeing the flattest loan growth for the year because it looks like activity is getting pushed out? Are you getting a sense from your customer base that people are waiting, not just necessarily for the second half of this year, but really are less inclined to do planning until they've seen more of an up take in what's going on in terms of demand?

I think it is a cautiousness of waiting for the orders as an example, in the manufacturing sector to come in and be firm and most are not expecting that until the second half. I would say that - that people are mildly more optimistic today than they were on the call at the end of the year.

OK. But not wildly, just mildly.

Just mildly, right.

OK. And how does the outlook look for, I know that it depends on which automotive company you are talking about, but does that look like things have stabilized there, that production may end up being a little higher than we thought it was because it's not falling off a cliff after October and after all those vehicles were sold in the fourth quarter? What's your customer base telling you there?

Well I think as I mentioned earlier, we expect car sales to be in that 16,500,000 range which - which is a strong year.

Right.

So, I think the picture there is generally good.

OK, well thank you very much.

Thank you.

Your next question comes from

with

.

Good morning, Gary.

Good morning. How are you both?

I'm good.

Good, thanks.

Could you just walking quickly through the - the trends that you see on the liability sides, particularly the deposits both from a geographical as well as just a - how the split up in the - in the various categories?

Well in - in general I would say we saw stability on all markets on the deposit side. In particular in the title escrow business in California, you would expect as rates move up that that would flatten out and in effect it has. It's actually down slightly in the, or down in the first quarter. That - those deposits really are key to activity in the housing market and with rates moving up that refinance and sales have slowed. Now having said that, the strategy we have there is really to broaden the customer base on a national basis and provide more stability to that - that deposit base than just the ups and downs in interest rates.

And more - outside of title and escrow could you describe trends in the rest of - rest of the area?

Generally it's been pretty steady up, in a - in a low single digit rate. Which wouldn't be unexpected in this environment I think.

Thanks very much.

Thank you.

Good quarter.

Your next question comes from

with McDonald Investments.

Hi, Brad.

Good morning

. Two questions. One is the clarification of indicated

whether the $25,000,000 loan

this quarter?

No it was $5,000,000.

Oh, it was $5,000,000?

$5,000,000 at a slight gain.

OK. And then secondly, I - I note that your loan loss reserve relative to total loans went up this quarter. Is that a permanent shift upwards or is that increase just

.

Well I think as we mentioned in the past, Brad, as non-performing moves up in our estimated range, it will fall for higher reserves, and that's in essence what we've done.

OK. And I note that at times you've also looked at reserve, relative reserve typically the charge offs and

are expected to peak at

still have pretty good coverage, might you take that down at - at

later - later this year or early next year?

I wouldn't - I would not forecast that Brad, because I think at that point in time we'd look at the makeup of the portfolio and build the reserve accordingly from the ground up as we always do and take a look at where it needs to be. So, I think that at this point I wouldn't be able to forecast that out for you.

OK. OK, thanks Ralph.

Thanks for your question.

Your next question comes from

with Merrill Lynch.

Good morning, Ralph.

Hi Ed.

Just a question really related to the margin outlook. You've obviously got some pretty specific economics guidance or forecasting that you are doing and assuming that environment transpires, maybe you could give us some more detail on - on margin outlook within your economic scenario. And secondarily, you mentioned that the loans that are on non-performing status have been charged down to about 75 percent of face value. I wonder if you can provide some color, if you are seeing the resolution of - of those loans or - or if you are feeling like - like as those loans get resolved over time, in the current environment that you've got additional charge offs typically down - beyond that 75 percent of if that's, you know, typically proving to be enough or -- or at least enough in line with historical trends?

OK. Let me start with the margin question. As long as it - earning asset growth is flat, you would expect that margin, especially with changes in mix, to be at about where it is. If, as I mentioned earlier, earning assets begin to grow as we expect in the second half, then you would expect to see the margin begin to come down, probably two to four basis points a quarter. But, you would see the positive increase in net interest income. And - and that's pretty much where we've been with prior estimates as well. The 75 percent reduction in contractual value in the aggregate in our non-performing, it - it's hard to say, we would have some that are better than that, just like the example I gave of the sale of the loan at a slight gain, and we'd have some below it. I don't think we've ever gone back and really looked to see of - the buys and the sells on - on average whether it came out around the 75 percent or not.

I guess the question is though, you are not necessarily, or maybe you are, feeling like in the current environment that - that loans that get to non-performing status typically end up having bigger charge offs from face value you know, as they go through the resolution process, than they have over your history?

I don't think there is any change there. As I think though your previous question, generally in the charge offs when history says it's been about 30 percent.

OK.

I don't feel different today with what's going in and out.

OK, great. Thanks.

Thanks for your question.

Your next question comes from

with

.

Good morning, Michael.

Good morning, Ralph. Just wondered that given that you've increased the charge off guidance and I think the long growth outlook is slower than before, but please verify if that's true. What's the offset in the earnings guidance, why is the earnings guidance still the same given that, you know, you've had a couple of components look like they might be a tad weaker than what you thought before?

The margin, and the mix in the margin would be higher than was originally expected.

OK.

Which is driving the interest income without the asset growth.

And - and again I - I'm - I think I missed a comment on that, but why - why is the margin a little bit higher than what you thought before?

One is pricing, both on the asset sides, spreads are better and being aggressive on the deposit pricing side as well. And the change in mix in the non-interest bearing deposits favorably.

OK. OK. Thanks very much.

Thanks for your question.

Again, I would like to remind everyone in order to ask a question, please press star then the number one of your telephone keypad.

Your next question comes from

with

.

Good morning.

Good morning.

I'm joining the call late, so if I ask something that was covered I apologize.

is that a rate I believe you previously have commented

to about 10,000,000 shares

. Do we continue at that rate throughout the year, do we pick it up, or - or slow it down?

We can - let me go at it in a little bit different direction. We go at a target of tier one common, which we exclude the preferred stock, to be about seven percent. In the environment we are in, we will shade that a little bit to the plus. So it's probably around seven one would be the target today, and currently it's estimated that at the end of the quarter we're at about seven and a half percent. So, we're above our target which with say, that we would continue to be in the market and especially with slow asset growth we will continue at our profitability levels to

capital fairly quickly. So we will continue to be in the market under those scenarios.

OK. So it would be a fair assumption though with

balance sheet growth that the next couple quarters we would see similar

to this - to this quarter?

Based on - based on your metrics, I think that's pretty close to being true.

OK. And let me - let me come back to Ed's question on margins. Is I know you guys manage the margin basically to be flat through - through - through rate cycles with this

and they certainly held the margin up

where it otherwise would have come in. As you get in to presumably, to an up rate environment next year which

indicating this, is there - is there any inclination to pull the

back just a little bit and let the inherent asset sensitivity of the balance sheet come through so that the margin holds up, the stated margin holds up, obviously the core margin will be up as the stated margin holds up better it otherwise would with the

.

No that would be counter to our strategy. Our strategy has always been to limit that interest rate risk. Occasionally we'll get a little bit one way or the other, but it's just timing in putting on the hedge.

OK. And then I - I joined the call like when - on the - on that question. Then to confirm in an up rate environment while the feds tightening

core deposits stick around in the banking system and the mix on the funding, but

we give up sort of two to four bits of margin per quarter while the feds tighten?

That's more driven by the growth in earning assets. As we grow in earning assets and put on marginal funds, that will contract the margin. That was what we were talking about earlier.

OK. Very good, thank you.

Thanks for the question.

Your next question comes from

with

.

Good morning, Chris.

Good morning, Ralph.

I guess I'm still wondering are we at or near the

based on what you were saying

.

Well as - as I've said in the past, Chris, typically when you see the turn or when we see the turn in the economy, non-performing and credit costs will lag the turn, usually two quarters, maybe three quarters. So if we are truly in the economic turn, which I believe we are, then you would expect it to see higher or at least this level of credit costs certainly for another couple of quarters. So it will continue to bounce around a bit.

And then on the - the allowance

how low can that go?

Well that - that's as we've talked about in the past, that's a statistic that we don't watch as closely as some do, we build our reserves really from the - the bottom up and look to see what we need to provide. And at this point it's 100 percent. And we feel comfortable with where our reserves are at the end of the quarter.

And the net charge offs again, a slight increase in the guidance there, 60 - 60 bits

comfortable with that 60 bits range?

50 to 60 for the year, we're comfortable with that.

OK.

Thanks very much.

Thank you, Chris.

This concludes this Q and A portion.

Thank you very much, I appreciate everyone being on the call and hope everyone has a good day. Bye.

This concludes today's conference call. You may now disconnect.