DBRS Confirms Comerica Inc. Senior Debt at ‘A’ Following Sterling Bank Acquisition Announcement

DBRS has today confirmed its ratings for Comerica Inc. (Comerica or the Company) and its subsidiaries, including the Company’s Issuer and Senior Debt ratings of ‘A’ and its R-1 (low) Short-Term Instruments rating. All ratings remain on Stable trend. The rating action follows Comerica’s reporting of 4Q10 financial results and its announcement to acquire the $5.2 billion in asset Sterling Bancshares (Sterling) for $1.03 billion in an all stock transaction with an estimated $80 million (after-tax) in merger-related charges. Subject to Sterling shareholder and customary regulatory approvals, the transaction is expected to close by June 30, 2011.

DBRS’s confirmation is based on its opinion that Sterling is a good strategic fit for Comerica, enhancing its existing market presence in Houston and Dallas while obtaining an entry into San Antonio; all markets with strong population growth rates relative to the rest of the U.S. Given that the acquisition is a 100% stock transaction, Comerica is able to maintain its strong capitalization with the pro-forma Tier 1 and Tier 1 Common capital ratios of approximately 10%.

Through impaired loan accounting, the Company also has the opportunity to mark-down the loan portfolio at closing, which is currently projected at 12%, or $330 million, in loan losses in addition to the 3.7%, or $120 million, taken by Sterling from 2008 through 2010. DBRS believes that the marks should minimize potential losses. Unsurprisingly, the steepest haircuts are on commercial real estate (CRE) construction and non-owner CRE real estate, the portfolios that have been the most stressed.

DBRS believes that the Company is paying a full price for Sterling (Texas transactions generally command higher premiums) while the transaction is projected to begin generating profits in 2013 (assuming the elimination of $56 million, or 35%, of Sterling’s run rate expenses). DBRS sees the integration risk as manageable given that it is essentially “in-market” and of manageable size at $5.2 billion in assets. To Comerica’s credit, it has traditionally been a thoughtful and strategic acquirer that has transformed its franchise by shifting toward higher-growth markets over time. The Sterling acquisition, while expensive, is consistent with that strategy.

Additionally, Comerica reported satisfactory 4Q10 financial results with sequential quarter improvement coming primarily lower provisioning from continued improved asset quality and stronger fee income generation. DBRS believes that Comerica possesses the financial fundamentals and improving credit quality to cope with the potential headwinds, while carefully controlling expenses in an environment where revenue growth is a challenge. In addition, Comerica maintains a solid capital and liquidity position that provides the Company with ample loss absorption capacity.

Comerica’s ratings are underpinned by its strong market presence and successful expansion into higher-growth markets. Following the repayment of TARP preferred stock in 1Q10 and the redemption of its $515 million trust preferred securities on October 1, 2010 (from which Comerica recognized a one-time pre-tax charge of $4.7 million in the fourth quarter), Comerica’s capitalization is strong with its Tier 1 capital consisting of 100% common equity. In 4Q10, Comerica’s regulatory capital levels were solid with Tier 1 capital, Total capital, and leverage ratios of 10.08%, 14.47%, and 11.25%, respectively. Tangible common equity and Tier 1 common capital ratios were 10.54% and 10.08%, respectively.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Rating Committee Chair: Alan G. Reid

Initial Rating Date: 24 April 2001
Most Recent Rating Update: 19 August 2010

For additional information on this rating, please see the linking document below.