CMA Comerica Inc

By Rachel Louise Ensign 

The biggest bank based in Texas, Comerica Inc., has long maintained that the burden of low energy prices would be manageable.

On Tuesday, the bank's executives conceded they are causing more pain than anticipated.

The Dallas-based bank's first-quarter earnings were hit hard by souring energy loans, leading the chief executive to say the bank needs to "earn the right to remain independent" and would consider potential deals.

It also said it has hired a consulting firm to help the bank become more profitable through expense cuts and revenue enhancements.

The bank said profit, which missed analysts' expectations, fell by more than half in the first quarter as it increased its reserves for bad energy loans due to persistently low oil and gas prices.

More than half of the energy loans at the bank are marked as "criticized" now, meaning they are at higher risk of default.

Deteriorating energy loans are widespread, weighing on the first-quarter earnings of the largest U.S. banks, including J.P. Morgan Chase & Co. and Wells Fargo & Co. But the suffering is especially acute at Comerica, where 6% of loans are energy-related, higher than at most other large banks.

With headquarters near the Barnett Shale, where the shale revolution has its roots, Comerica played down the impact even as the low prices persisted for longer than many expected.

CEO Ralph Babb Jr. said on Tuesday that the bank's "fundamental view on the energy sector has not changed significantly," even though it boosted reserves for bad energy loans. In the first quarter the figure was nearly 8%, up from around 4% in the prior quarter.

Beyond energy, the bank already was struggling with low interest rates that have made lending less profitable.

Mr. Babb said the consulting firm, Boston Consulting Group, was expected to look at "everything," but didn't specify exactly when the bank would start implementing the firm's suggestions.

Mr. Babb also said Comerica would "not hesitate" to consider strategic alternatives, though no specifics were given on any potential deal opportunities. Shares rose 4.2% to $41.64 Tuesday.

Investment firm Hudson Executive, which former J.P. Morgan Chase deal makers Douglas Braunstein and James Woolery started last year, disclosed an 0.8% stake in Comerica earlier this year. Hudson, which seeks to work behind the scenes to make changes at companies, has been engaging with other Comerica investors and management and believes the bank needs to cut costs and explore strategic alternatives, people familiar with the matter said.

Tuesday's announcements "made it clear that they are receptive to the frustrations of investors," said John Pancari, analyst at Evercore ISI.

With a market cap of roughly $7 billion, the list of possible suitors for the bank is relatively short. Most large U.S. banks that could conceivably buy Comerica are on the deal-making sidelines due to regulatory constraints, other pending deals or self-imposed abstentions from mergers. Some large international banks have expressed interest in U.S. lenders in recent years.

Comerica was in the bottom 25% of its peer group for earnings growth and return on assets between 2013 and 2015, according to a securities filing from the bank.

Comerica's criticized energy-related loans increased 41% to $2 billion, or 56% of the segment's loans. That was up from 38% of energy-related loans in the fourth quarter. Executives attributed some of that shift to new guidelines on how to evaluate energy loans issued by regulators earlier this year.

Comerica executives also said they saw a few energy customers draw down their credit lines, but that this wasn't a widespread issue. The bank said exploration and production customers' borrowing capacity has been cut an average of 22% in an ongoing spring review.

The bank's overall provision for credit losses rose to $148 million from $60 million in the prior quarter.

The energy issues overshadowed the benefit from the Federal Reserve interest-rate increase. Higher rates boosted revenue at Comerica, which is poised to benefit as rates rise.

The bank said it expected to gain about $90 million in revenue in 2016 from the December 2015 rate increase, which helped lift the net interest margin, a key metric of lending profitability, to 2.81% from 2.58% in the prior quarter.

At the same time, Mr. Babb conceded that the rate-sensitive position hurt the bank over the past few years. "In hindsight, we left too much yield on the table during a weak recovery," he said.

--David Benoit and Austen Hufford contributed to this article.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

April 19, 2016 18:27 ET (22:27 GMT)

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