DBRS Confirms Comerica Incorporated at ‘A’; Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings of Comerica Incorporated (Comerica or the Company), including the Company’s Long-Term Issuer Rating of ‘A’ and Short-Term Issuer Rating of R-1 (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Comerica Bank (the Bank). The trend for all 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 RATING CONSIDERATIONS
Comerica’s ratings and Stable trend reflect its leading middle market commercial lending franchise that is geographically diverse and supported by a stable, very low-cost deposit base. In addition, the ratings consider Comerica’s conservative credit risk management that has produced solid through-the-cycle asset quality metrics, as well as the Company’s historically robust capitalization and funding and liquidity, which also underpin the ratings. On the other hand, Comerica’s less diversified loan portfolio and lower fee income contribution compared to similarly-rated bank peers are also factored into the ratings.

RATING DRIVERS
DBRS views Comerica as well placed within its rating category. Over the long-term, further progress in improving profitability metrics and lowering its reliance on spread income, while maintaining its strong balance sheet, could lead to positive rating actions. Conversely, sustained deterioration in asset quality, or prolonged negative operating leverage, could result in negative rating pressure.

RATING RATIONALE
Comerica reported strong 2017 results, benefiting from its highly asset-sensitive balance sheet and Growth in Efficiency and Revenue (“GEAR Up”) initiatives. Excluding the impact from tax reform, the Company generated an adjusted return on assets of 1.19%, a double digit return on equity and an efficiency ratio below 60%. DBRS notes that these metrics were in line with the targets that Comerica guided to when it announced GEAR Up in 2016, with revenue and expense goals remaining on track.

In 2017, average loans were essentially flat, despite strong growth in National Dealer Services (up 9%), as energy balances again declined considerably (down 25%) and now represent just 4% of total loans. Looking ahead, management expects loans to grow in line with GDP growth in 2018, with most business lines expanding, while Energy and Corporate Banking are expected to be stable. Nonetheless, the Company is well-positioned for revenue growth given its highly asset-sensitive balance sheet (loan portfolio is approximately 90% floating-rate) and expectations for at least a couple of more rate hikes during the remainder of 2018. Importantly, Comerica’s asset quality remains strong, with declining criticized, nonaccruals and net charge-offs (NCO ratio of 0.19% in 2017). Additionally, outside of energy, the rest of the loan portfolio continues to perform very well.

Comerica’s funding and liquidity remain strong, supported by its sizable deposit base, which is comprised of a considerable amount of noninterest-bearing balances (54% of total deposits), providing one of the lowest cost of funds in the industry. For 2017, total deposits declined modestly, principally due to customers deploying excess liquidity into working capital needs, as well as disciplined pricing and strategic actions taken early in 2017 in light of the new LCR rules. Positively, Comerica’s deposit betas have remained very low overall and versus peers. DBRS notes that this is largely attributable to commercial operating deposits comprising the vast majority of noninterest-bearing balances, while the majority of interest-bearing deposits are derived from retail. Meanwhile, consistent with historical trends, capital metrics remain robust, with a tangible common equity ratio of 10.3% at year-end.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $72 billion in assets at December 31, 2017.

The Grid Summary Scores for Comerica are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile –Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 24 April 2001
Most Recent Rating Update: 30 March 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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