EUR 850.00 For Business Accounts Only

Morningstar | Comerica Continues to Focus on Commercial Clients in 2019

Comerica is a predominantly commercial-focused bank, with over 90% of loans related to commercial lending. While the bank started in Michigan and remains dominant in this market, Comerica has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica's largest, as almost 40% of the bank’s loans are now based there.Comerica remains very leveraged to interest rates, as the vast majority (almost 90%) of the bank’s loans are adjustable rate, making the bank one of the most interest-rate-sensitive names we cover. This, combined with the bank’s sticky deposit base from its core commercial clients, makes the bank ideally positioned for rising rates. The flip side of this business model is that the bank can be pressured during extended periods of low rates, which is exactly what we had seen prior to the latest cycle of rate hikes. This had led to optically poor performance for the bank, but this has quickly reversed as the rate environment has improved. The “Gear Up” initiative, which reached completion in 2018, brought some needed reductions to the bank’s overall cost base and led to significant operating leverage. We see the bank's returns becoming much steadier now, with improvements being harder to come by.Comerica has largely worked through the extra credit costs associated with energy clients, primarily in Texas. We expect that energy loans will remain at 5% or less of the total loan book and generally believe that Comerica is a good underwriter, adverse macroeconomic conditions aside. Overall, we like Comerica's longer-term prospects as the rate environment normalizes and the bank builds an improved cost base and extracts value from its deep, advisor-style relationships with small and midsize business clients. Fee streams related to payments and wealth management will also help the bank outearn its cost of capital over the long term.