Comerica Earnings: Pressure Building, With Lowered Expectations for Annual Growth

Comerica Stock at a Glance

• Fair Value Estimate: $76
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Comerica Earnings Update

Narrow-moat-rated Comerica CMA reported results that show additional earnings pressure building for the bank, but we continue to think the pressure is manageable. The bank lowered its outlook for full-year net interest income again, now expecting annual growth of only 1%-2% compared with 6%-7% previously.

Deposit pricing accelerated a bit higher than we had expected in the quarter, although the mix of non-interest-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.

We think this is important because the bank is currently priced at roughly 80% of adjusted tangible book value (excluding the effects of accumulated other comprehensive income). Even as the current earnings pressure plays out, we still expect the bank will be hitting a return on adjusted tangible equity of roughly 11%. Either there is additional stress around the corner that we are not anticipating, or we think eventually Comerica will get a better valuation.

As we update our projections, we plan to raise our deposit cost assumptions and lower our NII projections again, which we expect will lower our fair value estimate of $76 by a mid-single-digit percentage. Even after this update, shares look materially undervalued.

Another key item that has yet to play out is how much pricing the bank can get back from depositors on the way down, when rates are cut. In other words, we do not think this will be a one-way street, and deposit costs can come back down in the right rate environment.

The bank’s current sensitivity estimates show limited (less than 1%) sensitivity to individual rate cuts. A bottoming out for NII, stabilization for deposit costs, and further clarity on regulatory changes may be needed before investors come around, but we think these items will eventually play out.