DBRS Confirms Comerica Inc.’s Senior Debt at ‘A’; Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of Comerica Incorporated (Comerica or the Company) and its related bank subsidiary, including the Company’s Issuer & Senior Debt rating at ‘A’. The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Comerica’s ratings reflect the Company’s robust, low cost deposit franchise and strong market presence in providing financial services to a predominantly middle market business customer base across multiple geographies. Moreover, funding, liquidity, and asset quality all improved over the past year, while capital metrics remained relatively stable. The ratings also consider the low interest rate environment that is pressuring revenues, a loan portfolio heavily weighted towards commercial customers, and expansion plans into highly competitive newer markets.

The Stable trend reflects DBRS’s view that Comerica is currently well placed within its rating category. If the Company is able to improve profitability and lower its dependence on spread income, while maintaining its strong balance sheet, the ratings could be upgraded. Conversely, if profitability lags that of peers, or the balance sheet weakens, the ratings could come under pressure.

For FY12, Comerica reported net income of $521 million, a 33% improvement from $393 million in 2011. Positively, each market segment delivered higher net income in 2012 with Michigan seeing the largest improvement. The Company’s improved earnings were driven by higher net interest income despite margin pressure, higher non-interest revenues, lower provisions for credit losses and lower expenses. Moreover, adjusting for one-time items, adjusted 2012 revenues grew 5%, while adjusted expenses increased 3%, resulting in positive operating leverage. Overall, adjusted income before provisions and taxes was $806 million, an 8% increase from FY11. Given strong loan pipelines and the elimination of the Sterling Bancshares, Inc. (Sterling) merger and restructuring charges (completed in 4Q12), DBRS expects further improvement in profitability for 2013, absent unexpected deterioration in the U.S. economy.

Even with the difficult operating environment, Comerica has done an excellent job growing the loan portfolio. Indeed, the Company has had 10 consecutive quarters of average commercial loan growth and the loan pipeline remains solid. Moreover, the Company has achieved this level of loan growth with residential mortgage loans and commercial real estate loans contracting during 2012. While Comerica does portfolio residential loans for its private banking customers, the overall loan portfolio remains heavily weighted towards commercial borrowers with less than 10% of the total loan portfolio comprised of consumer loans. For the year, average loans increased $3.2 billion, or 8%, to $43.3 billion reflecting strong C&I growth, as well as the Sterling acquisition. Meanwhile, average deposit growth of $5.8 billion, or 13%, easily supported the loan growth.

DBRS notes that the Company’s deposit base is robust and completely funds the loan portfolio. Moreover, at just 0.23% in 4Q12, Comerica has one of the lowest cost of funds in the banking industry. As a result, Comerica has little leeway to bring down funding costs further, while earning asset yields remain pressured by the low interest rate environment, which has contributed to net interest margin pressure (NIM). Specifically, the NIM compressed 16 basis points during 2012 to 3.03% from 3.19%, as declines in earning asset yields more than offset lower funding costs and higher accretion from Sterling. Given Comerica’s primarily floating rate loan portfolio, as well as its low-cost deposit base, the Company remains very asset sensitive and would benefit significantly from higher rates.

Asset quality trends continue to improve and are now within the Company’s historical ranges. Indeed, nonperforming assets (NPAs), watch list loans and net charge-offs (NCOs) all declined during the fourth quarter. Specifically, watch list loans declined $565 million to $3.1 billion, NPAs declined $168 million to $587 million, or 1.27% of total loans and foreclosed property, and NCOs were $37 million, or 0.34% of average loans (annualized). Problem loan balances were helped by a number of debt and short sales in 4Q12. DBRS notes that the average carrying value of the Company’s non-accrual loans was approximately 60%. Moreover, the allowance for loan losses was 116% of nonperforming loans and covered annualized 4Q12 net charge-offs by over four times. As a result of improving asset quality, Comerica’s provision for credit losses declined to $16 million from $22 million in 3Q12, even with loan growth.

Despite returning 79% of net income to shareholders in 2012 and growing the balance sheet, capital remains strong. Specifically, the Company’s tangible common equity ratio was a robust 9.71% at year-end. The Board has approved a 13% increase in the dividend and the Company has already submitted its capital plan to the regulators for 2013 with results to be announced in mid-March.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $65.4 billion in consolidated assets as of December 31, 2012.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include the company documents, the Federal Reserve, 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 24 April 2001
Most Recent Rating Update: 11 October 2011

For additional information on this rating, please refer to the linking document under Related Research.