Risk

Comerica to Cut Workforce by 9%, Close 38 Branches

Comerica bank is forced to cut expenses in response to falling second-quarter profits and a troubled energy loan portfolio.
Christopher HosfordJuly 19, 2016

Comerica Bank, reporting lower profits in its second quarter, announced plans to reduce its workforce by about 9% and consolidate branches in an attempt to drive additional income.

Comerica’s efficiency plan will cut about 790 of its 8,792 full-time employees and close some 38 of its 473 branches. The move is expected to drive additional annual pre-tax income of about $140 million through the end of 2017, and $230 million by year-end 2018, the bank said.

The Dallas-based regional bank reported second-quarter net income of $104 million, or 58 cents per share, well below analysts’ estimates of 69 cents per share of income. Net income was also 23% lower than the $135 million (73 cents per share) reported in the same quarter a year ago. Falling profits were attributed to overall higher expenses, continuing low interest rates, and a troubled energy loan portfolio that threatens repayments.

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Comerica’s energy loans declined by $356 million from the previous quarter. The bank reported $550 million of nonaccrual loans, reflecting uncertainty over timely repayments.

“”We have completed 88% of the spring redeterminations for our ([energy] exploration and production) customers, and borrowing bases have come down about 22% on average,” Ralph W. Babb Jr., Comerica chairman and CEO, said. “Criticized energy loans have declined $281 million to 57% of energy loans as of the end of the second quarter. While oil and gas prices have improved, we remain cautious and believe with our reserve allocation at over 8% of energy loans as of June 30, we are adequately reserved. Credit quality in the remainder of the portfolio remains strong.”

Comerica’s second quarter results also included after-tax restructuring charges of $34 million and $53 million in severance-related expenses and professional-service charges, both associated with the initial phase of the cost-cutting program.

Comerica reported second-quarter revenue of $714 million, up 5.2% over the $679 million logged in the year-ago quarter, helped by an increase in fee income.

However, the bank’s net interest margin, a measure of lending profitability, declined quarter-over-quarter. The net interest margin was 2.74% in the second quarter, down from 2.81% in the first quarter and up from 2.65% a year prior. Net interest income increased 5.7% year over year, however, helped by higher yields on Federal Reserve deposits and asset growth.

“We expect our efficiency ratio to improve, declining to the low 60% range by the end of 2017, and at or below 60% by year-end 2018, without any increase in interest rates,” said Babb. “The initial actions will take us a long way to achieving a double-digit return on equity and enhanced shareholder value. Management will continue to identify additional opportunities to further enhance profitability.”