Company Reports

Narrow-moat-rated Comerica was mostly steady in the first quarter of 2024. Earnings per share of $0.98 missed the FactSet consensus estimate of $1.09, but excluding the FDIC special assessment and hedging losses, we estimate core EPS of $1.28. We attribute much of the core EPS beat to better-than-expected net interest income and lower loan-loss provisions. There was little in the earnings release that would alter our long-term view of the firm. We will maintain our $73 fair value estimate and regard the shares as undervalued.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Narrow-moat-rated Comerica reported a decent fourth quarter, in our view. With many moving parts such as the preannounced charges related to the discontinuation of the Bloomberg Short-Term Bank Yield index, or BSBY, elevated restructuring charges, and FDIC assessment charges, we note that consensus estimates may not offer meaningful comparisons with actual results. In our view, the firm’s net interest income outlook was a touch soft as deposit costs continue to rise. Overall, we will maintain our fair value estimate of $73 on Comerica’s shares and regard shares as undervalued.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

Narrow-moat-rated Comerica reported decent third-quarter results on the surface. It largely met or exceeded expectations as reported earnings per share of $1.84 beat FactSet consensus of $1.69 and our own estimate of $1.59. However, the beat was largely driven by lower provisioning, and while the bank maintained its full-year outlook for net interest income, the implied run rate for 2024 is a bit worse than we had expected.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

Narrow-moat-rated Comerica reported results that show additional earnings pressure building for the bank, but we continue to view the pressure as manageable. The bank lowered its full-year net interest income outlook once again, as the bank now expects annual growth of only 1%-2% (down from 6%-7% previously). Deposit pricing accelerated a bit higher than we had expected in the quarter, although the mix of noninterest-bearing deposits and overall deposit balances (which grew in the quarter) met expectations. Therefore, while pricing is accelerating and our full-cycle deposit beta estimate will go up, other aspects of the bank’s funding base are performing as expected.

A May 29 American Banker report details compliance issues related to Comerica’s handling of a Treasury Department program known as Direct Express. Comerica has been involved in this program, which is a way for people without a bank account to receive federal benefits, for years. Complaints about the program have bubbled up in the past, and there are several lawsuits outstanding. However, there were some new details in this report.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Narrow-moat-rated Comerica reported first-quarter results that show earnings pressure is building, but we view the pressure as manageable. We had already expected fourth-quarter results would be the peak for profitability in the current rate cycle, and while the drop-off from that peak has accelerated a bit, it is nothing categorically different. We think the market did a reasonable job of sorting Comerica on a relative basis into the higher-risk names, as the bank is indeed facing more earnings pressure than most peers we cover, but on an absolute basis, we have a hard time getting to today’s market price. This is even after reviewing the damage of a post-March banking environment. As we update our projections once again and make sure we are being prudent with our through-the-cycle net interest margin estimate (assuming rates eventually fall from current levels), we may lower our $79 fair value estimate by a low- to mid-single-digit percentage, but we believe the shares remain materially undervalued.

As we look at the U.S. banks, we believe the sector is currently undervalued. However, in an effort to help investors focus their efforts, we are highlighting Comerica, U.S. Bancorp, and Citigroup—each has its own risk/reward setup.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, with roughly one third of the bank’s loans now based there.

Narrow-moat-rated Comerica reported fourth-quarter earnings per share of $2.58, roughly in line with the FactSet consensus of $2.55 and a bit below our own estimate of $2.78. Top-line revenue came in at $1,020 million, in line with both consensus and our own estimate, while expenses of $541 million essentially matched our own estimate of $539 million. As such, this quarter largely turned out as expected.