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 leading middle market commercial lending franchise that is geographically diverse and underpinned by a stable, very low cost deposit base. Moreover, the balance sheet remains strong with healthy asset quality and sound capital. The ratings also consider below-peer profitability that is being hampered by the low interest rate environment, its modest energy-related lending exposures, and smaller retail operation relative to its peers.

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 metrics and lower its dependence on spread income, while maintaining its strong balance sheet, the ratings could be upgraded. Conversely, prolonged negative operating leverage or the balance sheet weakening, could result in negative ratings pressure.

2014 was highlighted by strong average loan and deposit growth, solid expense control, and improved asset quality. For the third consecutive year, Comerica was able to deliver positive operating leverage on an adjusted core basis, although last year’s operating leverage was achieved with a modest decline in core revenues. DBRS notes that without higher interest rates, Comerica is unlikely to report positive operating leverage in 2015. Overall, net income was $593 million in FY14, an increase of 10%, or 4% excluding the impact of an unfavorable jury decision from FY13 results.

Positively, average loans grew 5% to $46.6 billion primarily reflecting growth in Technology & Life Sciences, National Dealer Services, Energy and general Middle Market, which more than offset a decline in Mortgage Banker Finance. Comerica anticipates similar loan growth for 2015. Meanwhile, average deposits increased a strong 6% to a record $54.8 billion driven primarily by growth in noninterest-bearing deposits. The growth was broad-based with Comerica increasing deposit levels in nearly all of its business lines in each major geography.

Underpinning the rating is Comerica’s very strong funding and liquidity that includes a very low cost and stable deposit base. At just 0.16% at 4Q14, the Company has one of the lowest cost of funds in the industry benefitting from a high component of noninterest-bearing deposits that represented 46% of average deposits at year-end.

Comerica’s liquidity coverage ratio was slightly below 80% at year-end. The Company plans to add high quality liquid assets during 2015 to meet the 90% January 1, 2016 requirement, and continue to adjust assets to be fully compliant by January 1, 2017. Management noted that complying with the LCR should not have a material impact on earnings.

Credit quality remains strong. Specifically, criticized loans (includes Special Mention, Substandard, and Doubtful loans) declined by $367 million and nonperforming assets declined by $83 million to $300 million, or just 0.62% of total loans and foreclosed property, in 2014. Meanwhile, net charge-offs were a low $25 million, or just 0.05% of average loans. While the allowance for loan losses declined modestly in 2014 reflecting improving credit quality trends, reserves did increase in both the Energy and Technology and Life Sciences portfolios. Overall, the allowance for loan losses was a sufficient 1.22% of period-end loans, or more than double total nonperforming loans.

At year-end, the Company’s energy portfolio, which totals approximately 7% of the total loan portfolio, remained unaffected by the rapid decline in energy prices seen since 2H14. Comerica did increase its qualitative allowance energy allocation, however, as a precaution. DBRS notes that during 2009 when oil prices dropped below $50 for five months, Comerica’s energy-related net charge-offs totaled 69 basis points outperforming the Company as a whole. While not a concern yet, the longer prices remain at current levels, or lower, the more likely credit problems will surface. The Company noted that their typical energy customer hedges approximately 50% of their production for two years. Given the progress Texas has made diversifying its economy to become less reliant on energy, management believes Texas’ robust rate of growth will slow if energy prices remain depressed. Moreover, Comerica’s other footprints in California and Michigan should benefit from lower energy costs reflecting the benefits of geographic diversification.

Capital remains sound with an estimated fully phased-in Tier 1 common risk-based ratio of 10.3% and a tangible common equity ratio of 9.85% at year-end. During 2014, the Company repurchased 5.2 million shares for $249 million. Combined with dividends, Comerica paid out $392 million, or 66%, of 2014 net income to shareholders. In March, the Federal Reserve did not object to Comerica’s 2015 capital plan, which increases the dividend by 5% and repurchases up to $393 million of common shares through 2Q16.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $69.2 billion in assets at December 31, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: 17 March 2014

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