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), including the Company’s Issuer & Senior Debt rating at ‘A’. At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Comerica Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (high), while its Support Assessment remains SA1. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

Comerica’s ratings and Stable trend reflect its leading middle market commercial lending franchise that is geographically diverse and supported by a stable, very low cost deposit base. The ratings also consider the challenging operating environment, including low interest rates, sluggish economic growth and declining energy prices, which have particularly impacted Comerica’s bottom line results in recent years. Positively, the Company is well positioned for rising rates, with a loan portfolio that is more than 90% floating rate, and should meaningfully benefit from faster economic growth, considering the attractive markets in which Comerica operates. Additionally, potential regulatory relief and tax reform would provide an added boost to the Company’s profitability, as well as to the entire industry. Lastly, DBRS views Comerica’s conservative credit risk management, which has produced solid through-the-cycle asset quality metrics, and the Company’s historically robust capitalization and funding and liquidity, as other key underpinnings to the ratings.

From DBRS’s perspective, Comerica’s 2016 performance represented an inflection point for the Company. Following weak 1Q16 results due to materially higher provisions associated with deterioration in the Company’s energy loans, Comerica launched the Growth in Efficiency and Revenue (“GEAR Up”) initiative in 2Q16, targeting revenue enhancements through deepening customer relationships by expanding its product set, improving analytics and leveraging technology, as well as accelerating growth in middle market banking by standardizing its approach across all markets for sales, training and performance management. On the expense side, the Company stated that it would reduce its workforce by 9%, remove layers of management, consolidate key functions, streamline credit processes, enhance IT capabilities and consolidate about 40 banking centers. Overall, the Company expects GEAR Up will increase annual pre-tax income by $270 million, with an efficiency ratio at or below 60%, without an increase in interest rates, approaching a double-digit return on equity by the end of 2018.

Positively, Comerica’s 2H16 results were markedly improved, benefiting from the stabilization in its energy portfolio and contributions from GEAR Up, though the Company’s profitability metrics still considerably trail its pre-crisis levels, as well as those of similarly-rated peers. Looking forward, DBRS expects profitability to continue to improve, reflecting successful execution on GEAR Up, as well as the Company’s highly asset sensitive balance sheet, and prospects of a much improved operating environment, particularly for banks.

Importantly, Comerica’s credit fundamentals remain strong, including asset quality, with very low net charge-offs (NCO ratio of 0.29% in 2016) and declining criticized loans. In aggregate, energy-related balances declined by more than $1 billion, or 28% from 2015, and represented less than 5% of total loans at year-end, with its energy reserve allocation remaining above 7%. Additionally, excluding energy, the rest of the loan portfolio continues to perform very well. Finally, the Company’s funding and liquidity profile, as well as capitalization, remain favorable, consistent with long-term trends.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $73 billion in assets at December 31, 2016.

RATING DRIVERS
Given DBRS’s view that Comerica is in the bottom tier of its rating category, DBRS does not currently see any intermediate term positive rating implications. Conversely, sustained deterioration in asset quality, or if the Company’s risk appetite materially changes, could result in negative rating pressure. Additionally, failure to deliver on its GEAR Up profitability expectations could result in negative ratings pressure.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2017) and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under 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.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Global Credit Policy
Initial Rating Date: 24 April 2001
Last Rating Date: 15 April 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.