Morningstar DBRS Confirms Comerica Incorporated’s Long-Term Issuer Rating at ‘A’; Trend Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Comerica Incorporated (Comerica or the Company), including the Company's Long-Term Issuer Rating of `A'. At the same time, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Comerica Bank (the Bank). The trend for all credit 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 SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
Comerica's credit ratings and Stable trend reflect its well-established, leading middle-market commercial lending franchise that is supported by a low-cost deposit base with a significant level of non-interest bearing deposits. In addition, the Company typically generates sound financial results. The credit ratings also consider the Company's proven conservative credit risk management. Comerica's somewhat less diversified loan portfolio and lower-than-peer levels of fee income are also factored into the credit ratings. The more challenging operating environment, especially for deposit gathering, the level of unrealized losses in the investment securities portfolio and the potential impact on earnings and capital in the unlikely scenario that those losses are realized are also factored into the credit ratings.

CREDIT RATING DRIVERS
Over the longer term, increased scale of the franchise, including greater revenue diversity, while maintaining a similar risk profile, would result in an upgrade of the credit ratings.

A sustained deterioration in asset quality, or prolonged negative operating leverage, would lead to a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good / Moderate
Headquartered in Dallas, Comerica operates a relationship-focused commercial banking franchise primarily in middle-market lending, as well as a few industry verticals. While the bulk of its loan and deposit franchise is focused on its three main footprint states of California, Michigan and Texas, the Company has lending relationships on a national basis in some business lines.

Earnings Combined Building Block (BB) Assessment: Strong / Good
Comerica's business mix usually creates sound returns and a strong net interest margin. Despite absorbing the FDIC special assessment and net BSBY cessation hedging losses that adversely impacted noninterest income, earnings were strong in 2023 and good in 1Q24, as credit costs have remained low. Specifically, the Company reported $854 million of net income to common shareholders in FY23 equating to solid returns on assets (ROA) and equity (ROE) of 1.01% and 16.50%, respectively. Most recently and adjusting for non-core items in 1Q24, Comerica reported net income to common shareholders of $171 million, representing a ROA of 0.86% and ROE of 12.22%.

Risk Combined Building Block (BB) Assessment: Strong / Good
Comerica's current asset quality metrics are very sound remaining below historical averages, with non-performing assets of 0.43% of loans at March 31, 2024. Additionally, net charge-offs were just 4 basis points in 2023 and 10 basis points in 1Q24. However, criticized loans have been increasing and, going forward, Morningstar DBRS expects asset quality to weaken somewhat from the current still unsustainably low levels. Factoring in the expected deterioration, the Company has been modestly building its allowance for credit losses. Looking forward, the Company expects FY2024 NCOs to be at the lower half of the 20 to 40 basis points range.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
Comerica's funding and liquidity remains solid, supported by its deposit base, which is comprised of a considerable amount of noninterest-bearing balances (41% of total deposits as of March 31, 2024). However, a large percentage (approximately 42% less affiliate deposits) of deposits are uninsured, which has made Comerica potentially more vulnerable to deposit outflows in times of stress. Partially mitigating this concern, the Company's deposit retention has been strong over the last year with average deposits down less than 4% from 1Q23 to 1Q24. Moreover, Comerica has made significant progress reducing its use of wholesale funding while building available liquidity. Overall, Morningstar DBRS views Comerica as having sufficient on balance sheet and access to liquidity to offset a potential decline in deposits and the loan to deposit ratio, at 80%, remains below historical averages.

Capitalization Combined Building Block (BB) Assessment: Strong / Good
Morningstar DBRS considers Comerica's capital levels, including its CET1 ratio of 11.47% at March 31, 2024 as strong, and well above its internal target of 10.0% and 135 basis points above the 10.12% level a year ago. At 7.99%, Comerica's CET1 ratio would also meet minimum capital requirements if AOCI (investment securities portfolio losses of $2.2 billion net of tax at quarter end) was incorporated.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/433166.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (April 15, 2024). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. Morningstar DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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