TARP Dividends Weigh on Comerica

Net charge-offs were an annualized 1.3% of total loans, higher than last quarter's 1.0% rate. We expect loan losses to continue to rise for some quarters as some of the bank's main markets and loan portfolios have been very hard hit from the economic downturn. One of our biggest concerns is its Midwest region (home to almost 40% of the bank's loans), where unemployment rates are among the highest in the nation. Furthermore, the bank has 9% of its portfolio in construction loans, whose net charge-offs rose to 5.2%, compared to 3.0% in December 2008. Another segment where we expect more pain to come as a result of the recession is commercial real estate, which makes up 22% of the bank's total portfolio.

With regard to Comerica's capital position we have no big worries. We think tangible common equity at 7.3% of tangible assets is enough for the bank to absorb its expected losses. During the call, management expressed its intent to repay the $2.25 billion it received from the TARP when it considered doing so feasible. However, we think there are more loan losses on the way for Comerica that will pressure profitability for some quarters, preventing the company from building up its capital quickly. Hence, to repay the government, the bank would probably have to raise some dilutive equity. On the other hand, it can opt to retain its TARP funds, in which case common shareholders will continue to bear the burden of the preferred dividend.