Comerica Inc . (NYSE:CMA), a Texas-based regional bank with significant operations in Michigan and California, is navigating a challenging financial landscape as it enters 2025. With a market capitalization of $8.28 billion, the bank, known for its focus on commercial and industrial loans as well as commercial real estate, has seen mixed results in recent quarters. According to InvestingPro data, nine analysts have recently revised their earnings estimates upward, suggesting potential optimism despite the challenging environment. The stock currently appears slightly undervalued based on InvestingPro's comprehensive Fair Value analysis.
Net Interest Income and Margin Outlook
Comerica's net interest income (NII) and net interest margin (NIM) have been key areas of focus for analysts. Trading at a P/E ratio of 15.61x and maintaining an impressive 54-year streak of consistent dividend payments, the bank has experienced some positive momentum in these metrics, with expectations for continued improvement. InvestingPro subscribers can access detailed analysis of Comerica's financial health metrics and additional insights through our comprehensive Pro Research Report, one of 1,400+ available for top US stocks. In the fourth quarter of 2024, analysts anticipate an increase in both NII and NIM, supported by maturing swaps and securities, as well as the impact of the BSBY index.
Looking back, Comerica had projected robust NII growth of over 25% quarter-over-quarter in Q3 2022, with an increase of more than 32% for the full year 2022. However, more recent guidance has been more conservative, with InvestingPro data showing a 15.03% year-over-year revenue decline in the last twelve months. The bank maintains a healthy dividend yield of 4.51%, significantly above its 10-year average of 4%. The company reiterated its full-year NII guidance in September 2024, with the third quarter expected to be slightly higher than anticipated due to a shift from fee income.
Loan and Deposit Trends
Loan growth has been modest but trending positively. In early December 2024, quarter-to-date average loans showed a slight increase of 0.6%. This aligns with earlier projections from 2022, which indicated that average loan growth was trending at the upper end of the guided range of 1-2%.
Deposit trends, however, have been more challenging. In the same early December period, deposits decreased by 1.1%, attributed to the repayment of brokered CDs. The outlook for deposits has been cautious, with expectations of a 2% decrease and a downward bias. This trend is concerning, as it could potentially pressure total deposits and result in figures slightly below the full-year guidance.
Fee Income and Expenses
Fee income has been a area of weakness for Comerica. Analysts expect a slight decline in fees, with lower non-customer income being a contributing factor. This trend is anticipated to continue, with the bank projecting lower fee revenues in upcoming quarters.
On the expense front, Comerica has seen increases, with expenses growing by 3% in 2024. The bank anticipates higher expenses in the near term, which could put pressure on profitability. However, there have been instances where better-than-expected expense management has contributed to earnings beats.
Capital Management and Shareholder Returns
Comerica's capital position remains strong, with the Common Equity Tier 1 (CET1) ratio standing at 12.0%, or 9.1% excluding the Accumulated Other Comprehensive Income (AOCI) opt-out, compared to their target of 10%. This robust capital position has allowed the bank to consider resuming share buybacks.
After a hiatus of ten quarters, Comerica announced plans to resume share buybacks in the fourth quarter of 2024. The bank executed a $100 million Accelerated Share Repurchase (ASR) in October 2024, signaling confidence in its financial health. This move is supported by the bank's solid return on equity of 9% and strong cash generation, with InvestingPro data showing a robust cash return on invested capital of 12%. However, the market reaction to this move was mixed, with a slight decrease in share price following the announcement.
Credit Quality and Risk Management
Credit quality has remained relatively stable for Comerica. Criticized loans decreased by 10% in late 2024, indicating improved asset quality. Risk Profile Loans (RPL) remained unchanged at $172 million. Despite a 6% increase in non-performing assets earlier in the year, asset quality is projected to remain stable overall.
The bank's provisioning for loan losses has fluctuated, with an increase of 48.3% from 2022 to 2023, but projections indicate a decrease in 2024 before rising again. This suggests that while there may be some near-term improvements in credit costs, the bank remains cautious about potential future credit risks.
Direct Express Contract
A significant concern for Comerica is the uncertainty surrounding the Direct Express contract, which is set to expire on January 2, 2025. This contract accounts for $3.4 billion, or 13% of Noninterest Bearing Deposits (NIBD), and contributes $29 million to quarterly fees and expenses. The Treasury is expected to notify Comerica by December 3, 2024, if it intends to extend the contract.
The potential loss of this contract could have a substantial impact on Comerica's deposit base and fee income. Analysts have factored this uncertainty into their assessments, with some lowering price targets due to the potential negative impact on the company's 2025 outlook.
Bear Case
How will deposit outflows impact NII and funding costs?
Comerica faces challenges with deposit retention, as evidenced by recent declines in deposit balances. The anticipated 2% decrease in deposits, coupled with the potential loss of the Direct Express contract, could significantly impact the bank's funding structure. Lower deposit levels may force Comerica to rely more heavily on higher-cost funding sources, potentially squeezing net interest margins and putting pressure on net interest income.
Moreover, the shift in deposit mix, particularly the decline in non-interest bearing deposits, could further exacerbate funding costs. If this trend continues, Comerica may struggle to maintain its net interest income levels, especially in a competitive rate environment where attracting and retaining low-cost deposits becomes increasingly challenging.
Can fee income offset NII pressure?
Fee income has been a point of concern for Comerica, with projections indicating lower fee revenues in upcoming quarters. The bank is facing headwinds in non-customer related fee income, which is expected to impact headline fee growth and near-term earnings. Given these challenges, it seems unlikely that fee income will be able to fully offset the pressure on net interest income.
The potential loss of the Direct Express contract further compounds this issue, as it contributes significantly to Comerica's fee income. Without a substantial improvement in other fee-generating activities or the introduction of new revenue streams, the bank may struggle to compensate for NII pressure through fee income alone. This situation could lead to overall revenue compression and potentially impact the bank's profitability in the near to medium term.
Bull Case
What is the potential for NII/NIM expansion as rates rise?
Comerica's net interest income and net interest margin have shown signs of improvement, with expectations for continued growth in the coming quarters. The bank's asset-sensitive balance sheet positions it well to benefit from rising interest rates. As swaps and securities mature and reprice at higher rates, there is potential for significant NII and NIM expansion.
Furthermore, the impact of the BSBY index and the bank's ability to optimize its funding mix could contribute to margin improvement. If Comerica can successfully manage its deposit costs while benefiting from higher yields on its loan and securities portfolios, it could see substantial NII growth. This potential for NII/NIM expansion in a rising rate environment could be a key driver of improved financial performance and profitability for the bank.
Where are the best opportunities for loan growth?
Despite recent challenges, Comerica has shown resilience in its loan portfolio, with growth trending at the upper end of its guided range. The bank's strong presence in key markets such as Texas, Michigan, and California provides opportunities for continued expansion in commercial and industrial (C&I) loans and commercial real estate (CRE).
Additionally, Comerica's focus on specific industries and its expertise in middle-market lending could allow it to capitalize on niche segments that may be underserved by larger national banks. As economic conditions improve and business confidence strengthens, there may be increased demand for commercial loans, providing Comerica with opportunities to grow its loan book.
Moreover, the bank's strong capital position gives it the flexibility to pursue strategic lending initiatives or potentially acquire loan portfolios that align with its risk appetite and growth objectives. By identifying and capitalizing on these growth opportunities, Comerica could offset some of the pressures it faces in other areas of its business.
SWOT Analysis
Strengths
- Strong capital position with CET1 ratio above target
- Improving NII and NIM outlook
- Expertise in commercial and industrial lending
- Strong market presence in key regions (Texas, Michigan, California)
Weaknesses
- Fee income pressure and declining non-customer related fees
- Expense growth outpacing revenue growth
- Dependence on Direct Express contract for significant deposits and fees
Opportunities
- Potential for NII/NIM expansion in rising rate environment
- Resumption of share buyback program
- Niche market opportunities in middle-market lending
- Possible strategic acquisitions or loan portfolio purchases
Threats
- Uncertainty surrounding Direct Express contract renewal
- Deposit outflows and potential funding cost increases
- Competitive pressures in key markets
- Potential economic downturn impacting loan demand and credit quality
Analysts Targets
- Barclays (LON:BARC) - $68 Underweight (January 14th, 2025)
- Goldman Sachs (NYSE:GS) - Neutral (January 7th, 2025)
- Piper Sandler - $72 Neutral (December 10th, 2024)
- Barclays - $66 Underweight (October 29th, 2024)
- RBC Capital Markets - $56 Outperform (July 22nd, 2024)
The analysis in this article is based on information available up to January 15, 2025.
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