DBRS Confirms Comerica’s Senior Debt at “A”; Trend Negative

DBRS has today confirmed the ratings of Comerica Incorporated (Comerica or the Company) and its principal operating bank subsidiary, Comerica Bank, including Comerica’s Issuer & Senior Debt at ‘A’ and Short-Term Instruments at R-1 (low). At the same time, the trend for all ratings, except for the Company’s Short-Term Instruments rating, have been placed on Negative trend from Stable. The rating action follows a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

The Negative trend reflects DBRS’s view that 2009 will be a challenging year for the Company. DBRS believes that provisions will likely constrain earnings and could be accompanied by weaker revenue generation and higher expense pressures. DBRS views Comerica as a conservatively managed and operated regional bank that has been less negatively impacted by the hostile operating environment than many other banks. The Company’s relatively good performance to date is primarily due to its focus on its core business without stretching for higher yields or cutting-edge products, its commercial lending focus and geographic diversity. Comerica commendably continues to pull the levers within its control to position itself defensively by expanding loan spreads, closely monitoring credit quality, slowing de novo branching and has been cutting other expenses. DBRS notes positively that Comerica has already reduced its dividend to preserve capital.

A material weakening of Comerica’s risk profile with credit costs encroaching IBPT and/or significant revenue decline could result in negative rating actions. Well-contained credit costs and revenue stabilization could restore the trend to Stable.

In 2008, Comerica was modestly profitable generating net income of $213 million (which was down 69% over the prior year) and income before taxes and provisions (IBPT) of $957 million (decreasing a more modest 20% from the prior year). Aggressive 2008 provisioning totaling $686 million had the largest impact on earnings, but net interest income also suffered due to an asset-sensitive balance sheet in a sharply decreasing rate environment. Loan yields fell rapidly, while competition elevated deposit costs and low interest rates also diminished the spread contribution value of non-interest bearing deposit balances.

As expected, credit deterioration continued and was primarily driven by lending to residential real estate developers and commercial property in Michigan and California. However, Comerica has generally benefited from its relatively limited residential mortgage and consumer loan exposure. Exposure to the automotive sector, which has been intentionally reduced, is at more manageable levels and is performing well. Other loan portfolio sectors also continue to perform relatively well; however, DBRS expects credit costs to remain high in 2009 from the impact of an economic recession, rising unemployment and related effects on the business sector.

Nonperforming assets (NPAs), including delinquencies in excess of 90 days as a percentage of loans, were significantly higher at December 31, 2008 than a year earlier at 2.19% of total loans after steadily increasing during the year. Real estate construction loans were 47% of nonperforming loans (NPLs), commercial real estate added another 29%, while commercial loans were 22%. Net charge-offs (NCOs), too, increased substantially throughout the year totaling $471 million for the year and ending at 1.04% of average loans. At December 31, 2008, loan loss reserves covered only 84% of nonperforming loans, the lowest ratio of its similarly rated peers. Mitigating this concern, Comerica has already recognized a significant amount of the embedded loss content as nonaccrual loan balances have already been written down by 34%. Additionally, DBRS considers the loan portfolio to be sufficiently granular. In 2009, DBRS expects rising credit costs in Comerica’s commercial real estate, automotive and commercial lending portfolios with continuing high credit costs in the real estate construction portfolio. Given the Company’s relatively conservative underwriting discipline, however, losses are expected to be manageable.

Comerica’s ratings are supported by its continued strong market position in providing banking and other financial services to a predominantly middle market customer base and a sound financial risk profile. The ratings also consider the Company’s successful expansion into select higher-growth markets of California and Texas, while maintaining a dominant presence in the Michigan market.

Capitalization, liquidity and holding company fundamentals all improved over the year primarily due to the receipt of $2.25 billion of capital issued under TARP in November 2008. Also notable is the Company’s relatively strong tangible common equity to tangible assets ratio, which DBRS calculated to be 7.23% at year-end 2008. Wholesale funding reliance did increase to a higher-than-peer 50% in 2008 as declining Financial Services Division (FSD) deposits were replaced with brokered deposits and FHLB advances where Comerica has a remaining multi-billion capacity. DBRS regards the brokered funding as opportunistic but inferior to core deposit funding. The FSD deposits are expected to increase as the real estate markets recover.

Overall, the Company has successfully managed to navigate the difficult operating environment thus far while maintaining sound operating fundamentals, which supports the confirmation of Comerica’s ratings. The risk of declining IBPT and rising provisions, however, accounts for the Negative Trend.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.