CMA Q2 2025: Q3 NII Dips on Preferred Redemption, Higher Deposit Costs
- Sustainable Loan Growth and Robust Pipeline: Management highlighted strong loan production and pipeline activity—despite some near‑term deposit pricing headwinds, customers are increasingly investing and new loan opportunities are trending upward, which supports future revenue growth.
- Structural Tailwinds Boosting Net Interest Income: Despite a temporary dip in Q3 due to preferred stock redemption and higher deposit pay rates, the bank expects net interest income to rebound in Q4 as benefits from maturing swaps, securities, and steady loan growth take effect.
- Strong Capital Position Enabling Strategic Flexibility: With an estimated CET1 ratio of approximately 11.94%—well above the 10% target—the bank maintains robust capital that supports continued share repurchases and strategic investments to drive long‑term growth.
- Net Interest Income Vulnerability: The guidance and Q&A reveal that a near-term decline in NII is expected in Q3 due to preferred stock redemption and a sharp rise in deposit pay rates (twice the previous increase), potentially straining profitability.
- Rising Expenses and Efficiency Concerns: Management acknowledged that Q3 and Q4 expenses could be significantly higher (around $600,000,000 per quarter) compared to Q2—even after adjusting for one-time items. This, combined with ongoing issues regarding a high (worst-in-class) efficiency ratio, could hamper overall operating performance.
- Asset Quality and Credit Concerns: There was a noted moderate increase in criticized loans within the core middle market, driven by exposures in sectors with consumer components (e.g., luxury goods, liquor, transportation). This concentration raises concerns about potential asset quality deterioration in a higher-rate, inflationary environment.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +3% (from $824M in Q2 2024 to $849M in Q2 2025) | **The modest increase in total revenue is driven by strong retail bank performance that offset slight declines elsewhere, reflecting continuity in the positive trends seen in previous quarters. ** |
Commercial Bank Revenue | –1.5% (from $611M in Q2 2024 to $602M in Q2 2025) | **A slight decline in commercial bank revenue suggests margin pressures and structural challenges compared to the previous period, likely influenced by factors such as higher expenses or subdued fee income that persisted. ** |
Retail Bank Revenue | +15% (from $236M in Q2 2024 to $271M in Q2 2025) | **The robust 15% increase is primarily supported by improved net interest income and operational efficiencies that continued from earlier periods, indicating a strong rebound in the retail segment. ** |
Wealth Management | Minor decrease (from $126M in Q2 2024 to $123M in Q2 2025) | **The slight decline in wealth management revenue reflects modest pressures on fee-based income and investment fees, echoing subdued performance trends observed in the prior period. ** |
Finance Segment | Nearly unchanged (–$149M in Q2 2024 vs –$147M in Q2 2025) | **The Finance segment’s performance remained steady, as increases in net interest expense and improvements in noninterest income (e.g., hedging gains) balanced each other out, mirroring offsetting trends from the previous period. ** |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Average Loans | FY 2025 | down 1% to 2% | flat to down 1% | raised |
Deposits | FY 2025 | down 2% to 3% | down 2% to 3% | no change |
Net Interest Income | FY 2025 | increase 5% to 7% | grow 5% to 7% | no change |
Non-Interest Income | FY 2025 | increase approximately 2% | grow 2% | no change |
Non-Interest Expenses | FY 2025 | grow 2% to 3% | grow only 2% | lowered |
Net Charge Offs | FY 2025 | lower end of the normal 20 to 40 bp range | lower end of the normal 20 to 40 bp range | no change |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Loan Growth and Pipeline | Discussed in Q3 2024 regarding modest loan demand and expectations for growth , in Q4 2024 with projected increases and improved customer sentiment , and in Q1 2025 where cautious optimism and regional growth strategies were emphasized. | Q2 2025 reported strong loan growth with average loans up almost 1% and positive pipeline momentum driven by new loan production. | Consistent focus with increasing optimism, showing robust production and a more confident pipeline as the year progresses. |
Net Interest Income Dynamics | In Q3 2024, NII exceeded guidance with modest increases ; Q4 2024 noted a quarter‐over‐quarter boost driven by maturing portfolios ; Q1 2025 highlighted structural tailwinds and steady growth. | Q2 2025 noted stable NII at $575 million but highlighted a slight headwind due to preferred stock redemption, with a rebound expected later. | Near-term headwinds are offset by robust structural tailwinds, suggesting a temporary slowdown with expected recovery. |
Capital Position and Share Repurchase Strategy | Q3 2024 showed a strong capital base with CET1 ratios above targets ; Q4 2024 maintained a CET1 of 11.89% and outlined planned repurchases ; Q1 2025 emphasized a CET1 ratio of 12.05% and a flexible repurchase plan. | Q2 2025 reported a CET1 ratio of 11.94% and increased share repurchases of $100 million, reinforcing a conservative capital approach. | Consistent strength with steady share repurchase activity, ensuring capital adequacy and flexibility amid market fluctuations. |
Asset Quality and Credit Risk Management | Q3 2024 noted low net charge-offs and a conservative approach ; Q4 2024 emphasized flat allowances and manageable NPAs ; Q1 2025 described stable credit metrics despite some CRE pressures. | Q2 2025 reported low net charge-offs and the lowest non-performing loans in four quarters, with a moderate increase in criticized loans in specific sectors. | Stable asset quality maintained through conservative credit discipline with minor sector-specific pressures being monitored. |
Expense Management and Efficiency Ratios | Q3 2024 highlighted incremental expense increases and a focus on discipline ; Q4 2024 stressed the need to drive the efficiency ratio from the high 60s toward a target in the 50s ; Q1 2025 noted plans for modest expense growth while targeting long‑term efficiency improvements. | Q2 2025 reported improved expense management with a better efficiency ratio for the quarter, though it remains at 68% year‑to‑date, signaling ongoing challenges. | Ongoing efforts to control costs are evident but the efficiency ratio remains a challenge, showing modest improvement while long‑term targets are still several steps away. |
Deposit Mix and Funding Cost Pressures | Q3 2024 reported a stable 38% noninterest-bearing deposit mix and proactive pricing adjustments ; Q4 2024 noted flat noninterest-bearing balances amid a decline in brokered CDs ; Q1 2025 confirmed a consistent 38% mix with focused deposit pricing strategies. | Q2 2025 maintained the stable 38% noninterest-bearing deposit mix while experiencing a modest increase in deposit pricing due to funding cost pressures. | Consistent deposit mix management with proactive adjustments in pricing to address ongoing funding cost pressures. |
Macroeconomic Uncertainty and Interest Rate Impact | Q3 2024 described cautious optimism amid political and rate-related uncertainties ; Q4 2024 observed improved customer sentiment and reduced dependence on rate relief ; Q1 2025 noted increased uncertainty and a slight pullback in sentiment. | Q2 2025 reflected improved customer sentiment and strategic adjustments to offset rate pressures, with stable loan yields despite ongoing economic uncertainty. | Gradual stabilization is evident with sentiment recovering even though some uncertainties persist; the strategy adapts as economic indicators evolve. |
Environmental Services and Specialty Segments Growth | Q3 2024 highlighted strong performance in Environmental Services with consistent fee income and clear strategic importance ; Q4 2024 acknowledged contributions from energy and environmental services ; Q1 2025 provided detailed growth opportunities in Environmental Services and highlighted regional specialty opportunities, notably in the Southeast and Mountain West. | Q2 2025 mentioned that increased total commitments by $400 million were partly driven by growth in environmental services. | Consistent and growing focus with diversified sector opportunities, reinforcing the importance of these segments for future loan production. |
Preferred Stock Redemption Impact on NII | No mention in previous periods. | Q2 2025 introduced the preferred stock redemption impact as causing a slight drag on NII, due to cash reallocation. | New topic emerges in the current period, highlighting a potential near-term adverse impact on NII that was not previously a focus. |
AOCI Losses and Capital Adequacy Concerns | Q3 2024 noted a significant AOCI improvement and strong CET1 ratios despite adjustments ; Q4 2024 maintained strong capital levels while acknowledging AOCI fluctuations ; Q1 2025 reported an 82‑basis point improvement in tangible common equity thanks to favorable AOCI movements. | Q2 2025 expects continued AOCI improvement and reports a robust CET1 ratio of 11.94%, underscoring a solid capital position. | Consistent management of AOCI and capital adequacy with ongoing improvements, ensuring strong resilience despite market volatilities. |
Customer Sentiment and Utilization Rate Trends | Q3 2024 described customer sentiment as “cautiously optimistic” with early signs of deposit growth ; Q4 2024 highlighted improved sentiment and flat utilization rates ; Q1 2025 observed a step-back in sentiment accompanied by slight increases in utilization from specific activities. | Q2 2025 observed improved customer sentiment with stable, flat utilization rates, reflecting measured business activity and consistent trends. | Gradual recovery in sentiment is evident while utilization remains steady, indicating a balanced customer response amid economic challenges. |
Commercial Real Estate Challenges | Q3 2024 noted early signs of CRE payoffs and challenges with rate sensitivity ; Q4 2024 emphasized CRE as a key headwind with slow paydowns and sensitivity to interest rates ; Q1 2025 reported challenges with slower-than-expected payoff pace in CRE but some signs of stabilization. | Q2 2025 explicitly excludes CRE growth from overall business growth projections, reaffirming it as an ongoing headwind. | Persistent challenge across periods with minor stabilization efforts; CRE remains a consistent headwind affecting overall loan growth strategy. |
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NII Trajectory
Q: Why will NII dip in Q3?
A: Management explained that NII is expected to dip slightly in Q3 due to the preferred stock redemption and a marked increase in deposit pay rates—roughly double the 4 basis point rise seen in Q2—before rebounding in Q4 driven by strong loan growth and improved deposit inflows. -
Performance Outlook
Q: How will performance improve going forward?
A: They stressed that after a challenging phase, the focus is on organic growth, portfolio rationalization, and disciplined investing in key areas to improve margins and efficiency even as historical challenges are acknowledged. -
Expense Guidance
Q: Why are Q3/4 expenses higher?
A: Management pointed out that the higher expense forecast of about $600 million is largely due to deferred project spending, seasonal cost increases, and the absence of one-time benefits seen in Q2. -
Acquisition Outlook
Q: Does the asset threshold affect acquisitions?
A: They clarified that the $100B asset threshold isn’t a barrier; rather, any acquisition would only be considered if it makes strategic, cultural, and shareholder value sense amidst strong organic growth. -
Independence Standard
Q: When would you need to scale up?
A: Management emphasized that Comerica’s strategy is to earn its independence daily through strong capital and credit discipline, considering scaling only if long-term operational performance and shareholder returns deteriorate significantly. -
Deposit Pricing
Q: Why ease deposit costs in Q4?
A: They noted that the steep deposit pay rate increase in Q3 is a one-time market reset, expecting that in Q4, higher deposit inflows will steady prices back to normal competitive levels. -
Loan Pipeline
Q: How strong is your loan pipeline?
A: The team observed improved pipeline activity post-SVB, with noticeable loan growth momentum that, while not fully pre-crisis levels, looks promising for the rest of the year. -
Credit Quality
Q: What drove the rise in criticized loans?
A: Management described a moderate uptick in criticized loans, primarily in the middle market where consumer-related segments face rate pressure; overall, the underlying credit performance remains robust. -
Stablecoin Strategy
Q: Will you leverage stablecoin tech?
A: They indicated it’s still early days—with the right tech and talent in place, they’re closely watching regulatory developments, but no active stablecoin strategy is being pursued yet. -
Deposit Utilization
Q: Are clients using deposits for capital?
A: While some clients may use deposits for capital projects, management believes such activity will be largely offset by healthy organic deposit growth, keeping overall stability intact.
Research analysts covering COMERICA.