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

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

Comerica’s ratings and Stable trend reflect its leading middle market commercial lending franchise that is geographically diverse and underpinned by a stable, very low cost deposit base. Despite the Company’s pressured energy portfolio, which DBRS continues to monitor closely, non-energy related credit quality remains sound and reflects in the Company’s solid non-performing assets to total loan ratio of 0.80% at YE15, and low net charge-off ratio of 0.21% for 2015. Moreover, other balance sheet fundamentals remain solid, with strong liquidity and healthy capital. The ratings also consider the Company’s pressured, yet solid earnings generation capacity, which more than adequately covers current, yet increasing credit costs. DBRS notes that if Comerica’s deteriorating asset quality and increasing credit costs are sustained, and negatively impact the Company’s franchise strength and capital position, negative rating actions could occur. Meanwhile, DBRS does not anticipate any positive rating actions at this time.

Reflective of its franchise strength and diverse footprint, solid loan growth in California has more than offset slowing growth in the Texas markets due to the downturn in the energy sector, and lower average loan balances in Michigan. Specifically, average loans in California and Texas increased by 8% and 2%, respectively, while average loans in Michigan were down 1%. Meanwhile, underpinning its large low cost funding base, deposit generation was solid, as average deposit growth remained strong in California and Michigan, up 10% and 4%, respectively.

DBRS remains focused on the credit deterioration within Comerica’s energy and energy related loans, as well as the potential deterioration of non-energy loans, especially those originated in oil dependent regions. DBRS notes that lower energy prices from current levels could potentially exacerbate future deterioration within the portfolios including higher levels of non-performing loans, along with further increases in credit costs. Despite the sustained increase in criticized and nonaccrual energy loans, DBRS is comforted by Comerica’s conservative underwriting standards, as well as its core earnings generation’s capacity to cover reserve build and unexpected losses. Furthermore, DBRS’s concerns are offset by the Company’s strong liquidity position and sound capital profile. DBRS notes that a majority of the Company’s exploration and production loans have at least 50% of their production hedged up to YE16. Moreover, approximately 95% of the loans outstanding and 90% of total exposure in the energy business line are backed by various types of collateral, including oil and gas reserves, equipment, pipelines, and inventory. Finally, the Company remains focused on working with its customers and reducing the size of its energy portfolios.

Positively, core earnings provide a solid buffer against rising credit costs. Although pressured by the difficult operating environment, core earnings (income before provisions and taxes or IBPT) remain solid, reflecting sound commercial loan growth supported by a high level of non-interest bearing deposits. To absorb losses and potential future losses, Comerica provisioned $142 million for loan loss reserves in 2015, up from $22 million for 2014. DBRS notes that the 2015 provisions for loan losses were easily absorbed by the Company’s 2015 $867 million (DBRS calculated) of adjusted IBPT. Management remains pro-active in addressing the challenges within the energy portfolio, and the Company noted that if current conditions persist, an additional $75 million to $125 million in provisions, could result primarily in the 1Q16.

Importantly and providing further offset to deteriorating asset quality, is the Company’s strong liquidity profile which exhibits full compliance with the LCR, including a buffer, as well as Comerica’s sound capital position, including a CET1 ratio of 10.54% and a tangible common equity ratio of 9.70% at YE15.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $71.9 billion in assets at December 31, 2015.

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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 24 April 2001
Most Recent Rating Update: 31 March 2015

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