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. The ratings are further supported by a healthy, liquid balance sheet that includes a sound capital base and strong asset quality. While the low interest rate environment remains a revenue headwind, Comerica has done a good job managing the expenses within its direct control. The loan portfolio remains predominantly commercial in nature, but the Retail Bank and Wealth Management business segments are growth areas, as the Company improves its cross-selling to its ample commercial client base.

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 2013, Comerica reported net income of $541 million, an increase of 4% from $521 million for 2012. FY13 results included an unfavorable jury verdict that negatively impacted earnings by $28 million. The improved results were primarily driven by a lower provision for credit losses and lower expenses, which more than offset lower total revenues. Excluding one-time items and net securities gains, Comerica was able to deliver positive operating leverage, as expenses declined more than revenues.

In 2013, average loans grew $1.1 billion, or 3%, to $44.4 billion driven by strong commercial loan growth partially offset by declines in the commercial real estate portfolio. Specifically, average commercial loans grew 7%, as double digit loan growth in the Middle Market segment more than offset declines in Mortgage Banker Finance and Corporate Banking. Moreover, average deposit growth outpaced average loan growth building on an already robust funding and liquidity profile. DBRS notes that Comerica enjoys one of the lowest funding costs in the industry, which is a competitive advantage.

During the year, Comerica experienced broad-based declines in nonaccrual loans with the exception of home equity, which increased modestly. Overall, nonperforming assets declined $212 million, or 36%, to $383 million, or just 0.84% of total loans. Meanwhile, criticized loans declined 19% to $2.3 billion and represented 5% of the total loan portfolio. For the fourth consecutive year, Comerica’s net charge-offs (NCOs) exceeded the provision for loan losses, albeit at a declining rate. Regardless, DBRS views the Company’s allowance for loan losses as sufficient at 1.32% of total loans. DBRS notes that NCOs peaked in 2009 during the last downturn at $869 million, or 1.88% of average loans. DBRS expects the credit environment to remain benign in 2014.

The Company’s ample capital provides a solid cushion for unexpected losses and growth opportunities. In 2013, Comerica repurchased 7.4 million shares, which represented a relatively high 76% payout to shareholders when combined with dividends. Even with the high payout, capital metrics remain strong with a tangible common equity ratio of 10.07% at year-end. Meanwhile, the Company estimated that its Tier 1 common risk-based ratio would be 10.3% calculated under the final rule, as fully phased in, excluding most elements of accumulated other comprehensive income from regulatory capital, which is already easily in compliance.

Comerica submitted its 2014 capital plan to the Federal Reserve on January 3, 2014 and expects to receive the results of the review in March 2014. DBRS notes that previous submissions were subject to the Capital Plan Review program, but 2014’s submission will be the Company’s first submission over the more thorough Comprehensive Capital Analysis and Review program.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $65.2 billion in consolidated assets as of December 31, 2013.

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 methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. Both can be found on the DBRS website under Methodologies.

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
Rating Committee Chair: Roger Lister
Initial Rating Date: 24 April 2001
Most Recent Rating Update: 26 February 2013

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