Comerica Inc. capitalized on higher interest rates to raise the profitability of its lending and expand its margin substantially during the third quarter, the Dallas-based regional bank reported Oct. 17.
While average loans decreased slightly from the second quarter — due largely to seasonal slowdowns in middle market and national auto dealer services activity — interest income jumped more than 9% to $546 million on the heels of three Federal Reserve interest rate hikes.
Fed policymakers lifted rates twice in the first half of 2017, following a single increase late in 2016. Asset-sensitive banks such as Comerica have been able to follow those moves by raising rates faster on loans than on deposits, widening the spread between the two and benefiting their net interest margins.
In reporting net income attributable to common shares of $224.0 million, or $1.26 per share, Comerica said its NIM advanced by 26 basis points during the third quarter to 3.29%.
Though some of the margin increase — 11 basis points — came from interest recoveries on nonaccrual loans due to improvement in the bank's energy portfolio, even more was generated on higher loan yields.
Yields increased by 19 basis points during the quarter on higher interest rates, the company said. Comerica said its deposit rates, meanwhile, increased by 1 basis point.
During a call with analysts to discuss earnings, executives said Comerica would continue to benefit should the Fed raise rates further. Investors are looking for a rate increase late this year. In projections released after a September meeting, the Fed said a majority of policymakers anticipated lifting rates once more in 2017.
Rick Weiss, chief banking strategist at Ambassador Financial Group, said in an interview that capitalizing on rates is not a simple endeavor. Banks must actively manage their deposit bases, developing long-term ties with customers based on service rather than pricing, so that they can maintain or only gradually lift what they pay on deposits even as rates on their loans increase notably. Banks that can do this consistently in a rising rate environment are likely to attract more investors' attention, Weiss said.
D.A. Davidson & Co. analyst Gary Tenner said in an interview that, because the increase from interest recoveries is not likely to be repeated, Comerica's margin may be flattish in the fourth quarter. But if the Fed bumps up rates late in the year — most likely in December, Tenner said — Comerica is likely to show further margin improvement early in 2018 as variable-rate loans readjust following the hike.
"I don't think there is any doubt that if we get that move in December that the first quarter of '18 will be very positive for them," Tenner said.
Chairman, President and CEO Ralph Babb Jr. said on the call that roughly 90% of Comerica's loan are floating-rate, with the majority tied to a 30-day LIBOR. He added that the greatest share of the bank's funding comes from non-interest-bearing customer deposits.
"We expect the three rate increases that have occurred over the past year should alone drive more than a 10% increase in our full-year 2017 net interest income," Babb said.