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’. 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 supported by a stable, very low-cost deposit base. Additionally, the ratings consider the Company’s favorable credit profile, including its track record of conservative credit risk management and strong capital levels. 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 longer term, growing fee income levels and improving market shares in faster-growing geographies, while maintaining a 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 2018 results, benefiting from its highly asset-sensitive balance sheet (net interest income increased 14% versus 2017), Growth in Efficiency and Revenue (“GEAR Up”) initiatives and a lower federal tax rate. Specifically, the Company reported a return on assets of 1.75%, 15.8% return on equity and 54% efficiency ratio, achieving or exceeding all the targets set out when GEAR Up was launched in 2016. During 2019, Comerica expects to realize the full-year benefit of the 2018 rate hikes given that its loan portfolio is approximately 90% floating rate, but the Company will likely moderate its asset sensitivity somewhat during the year, which DBRS would consider prudent.

Comerica’s asset quality remains strong, with a 31% decline in criticized loans and net charge-off ratio of 0.11% in 2018. Additionally, the provision for credit losses declined $75 million to a net benefit of $1 million in 2018, boosting bottom line results.

In June 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act was signed into law, allowing banks with less than $100 billion in assets immediate exemption from Dodd Frank’s “enhanced prudential standards”. In turn, the Federal Reserve announced that Comerica would no longer be subject to stress testing and CCAR. Nonetheless, DBRS expects the Company will continue to manage capital appropriately, considering the substantial investments made in order to comply with post-crisis regulatory requirements. Indeed, Comerica is targeting a CET1 ratio of 9.5% to 10.0% by the end of 2019, which DBRS considers reasonable, particularly given the Company’s risk profile.

Comerica’s funding and liquidity remain strong, supported by its sizable deposit base, which is comprised of a considerable amount of noninterest-bearing balances (52% of total deposits), providing one of the lowest cost of funds in the industry. For 2018, total average deposits declined 2% from the prior year, primarily reflecting lower Middle Market balances and a shift in mix to more interest-bearing accounts. Positively, Comerica’s deposit betas have remained low overall and versus peers. DBRS notes that this is largely attributable to commercial operating deposits comprising most of the noninterest-bearing balances, while the majority of interest-bearing deposits are derived from retail.

Comerica, a diversified financial services company headquartered in Dallas, Texas, reported $71 billion in assets at December 31, 2018.

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 (July 2018), 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.

The rated entity or its related entities did participate in the rating process for this rating action. 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.

For more information on this credit or on this industry, visit www.dbrs.com.

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