CMA Comerica Inc

By Rachel Louise Ensign and Austen Hufford 

Comerica Inc. became the latest bank to announce major cost cuts in a move the lender says will help it cope with profit-sapping low interest rates that have no end in sight.

The Dallas-based lender said Tuesday in its second-quarter earnings release that it would cut about 9% of its workforce and shut down around 40 locations. The bank is also under pressure from investors to bolster performance and consider potentially selling itself.

Chief Executive Ralph W. Babb Jr. told investors the new cost-cutting and revenue-enhancement plans are "fundamentally changing the way we operate."

The regional bank reported a quarterly profit of $104 million, down from $135 million a year prior. On a per-share basis, earnings fell to 58 cents from 73 cents. The bottom line includes 19 cents a share of charges related to the new plans.

Revenue, a combination of net interest income and noninterest income, rose 5.2% to $714 million. Analysts polled by Thomson Reuters had anticipated 69 cents in per-share profit on $715 million in revenue.

The lender's plan is expected lead to $70 million more revenue through initiatives such as cross-selling and $160 million of cost reductions by the end of 2018. The company will take restructuring charges of between $140 million and $160 million over that time.

The bank's results reflected two key macroeconomic developments in the second quarter: falling interest rates and rising oil prices. The former squeezed the bank's lending profits, while the latter lifted the bank's earnings, which had been stung in recent quarters by higher provisions for potential loan losses in the sector.

The efficiency announcement comes after some Comerica shareholders mounted an effort to pressure the bank to bolster returns. At the bank's annual meeting in April, several shareholders publicly voiced their dissatisfaction with the lender's recent performance in an unusual show of dissent at such an event. Large shareholders told the bank it has failed to earn acceptable returns for too long and may be better off as part of a larger bank that can cut costs. The bank didn't give new specifics on potential deal talks on Tuesday.

Analysts were divided on whether the new effort would be enough to placate concerns. Evercore ISI analyst John Pancari wrote the announcement was "likely enough to appease" investors. The bank's shares rose 1.5% after the earnings announcement in Tuesday afternoon trading.

CLSA analyst Mike Mayo, who has spearheaded an effort by several large shareholders to persuade the bank to explore a sale, was skeptical about the plan. "Why does management have 2 1/2 more years when they've underperformed for so long?," he said, adding that Comerica didn't take the question he tried to ask on the earnings call. A Comerica spokesman declined to comment.

Comerica said the branch closures would represent about 8% of its total 473-branch network. The initial job cuts in the third quarter would be managers, and the rest of the cuts would be made by the end of 2017, Mr. Babb said in an interview.

Lower rates, which after the Brexit vote seem likely to stick around for longer than anticipated, also weighed on the bank. Net interest margin, an important measure of lending profitability largely tied to interest rates, came in at 2.74% in the June quarter, down from 2.81% in the quarter before and up from 2.65% a year prior. Net interest income increased 5.7% from the same quarter a year earlier on higher yields from loans and Federal Reserve deposits and asset growth.

The energy lending situation improved somewhat in the second quarter as oil prices rose from their first-quarter lows. The bank set aside less money for potential loans going bad than in the prior quarter and reduced its total loans in the sector. Still, 57% of its energy loans were criticized.

Fee-based income increased in the quarter. Noninterest income grew 4.3% to $269 million in the second quarter on increased card fees from merchant payment processing services and government card programs.

Higher software expenses and FDIC insurance premiums drove noninterest expenses up 19.9% to $519 million. The double-digit percent increase also includes the restructuring charge of $53 million for the quarter.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com and Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

July 19, 2016 14:09 ET (18:09 GMT)

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