EUR 850.00 For Business Accounts Only

Morningstar | CMA Updated Star Rating from 17 Jan 2019

There was a lot to like in narrow-moat-rated Comerica’s 2018 full-year results. What we liked most of all was the above-expectations full-year 2018 return on tangible equity of 17.9%, which is almost double our 9% cost of equity. That said, we are reducing our fair value estimate for the bank to $85 from $89 because we think the honeymoon period in which the bank can increase the yields on its commercial loan book without increasing rates paid to their depositors is closing. From here on out, we are forecasting that additional rate hikes will come with nearly-proportionate increases in deposit costs. We think that there is still some room for the bank to expand their net interest margin, but that the rate of improvement will be far diminished compared with the past.

On that same note, Comerica’s deposit costs are increasing a bit faster than we originally anticipated. We understand that the bank will need to shift deposits from noninterest-bearing to interest-bearing accounts as rates rise, but the shift is happening faster than we anticipated and the cost of interest-bearing deposits was higher than we anticipated. We do not think that these quarterly results materially detract from Comerica’s deposit cost advantage. Noninterest-bearing deposits still account for over half of the bank’s deposit base and Comerica retains one of the best deposit bases in our bank coverage. We think that Comerica will be able to maintain its advantaged deposit base as rates rise because the bank has deep full banking relationships with their commercial clients, which make up most of the noninterest-bearing deposits. The deep integration Comerica has with its commercial clients makes it less attractive for clients to switch to a new bank and work with new systems and bankers that are not as familiar with their businesses. We think this constitutes a switching cost, and gives Comerica an advantage.

We remain impressed with Comerica’s overall profitability. Revenue came in around our expectations, but lower than anticipated noninterest expenses, credit costs, and cash tax rate allowed the bank to dramatically increase their returns on tangible equity relative to 2017. Adjusted noninterest income was roughly flat for the year, while average loans were also roughly flat year over year. We anticipate that 2018’s returns on tangible equity was peak profitability for this asset-sensitive bank, and that the bank will be able to maintain upper-teens returns, even as we think that credit costs and deposit costs will increase from their presently rock-bottom levels.

For our recent analysis of deposit costs and net interest margins, please see our December 2018 Financial Services Observer, "The Return of the Bank: Net Interest Margins Reach a Turning Point."