Morningstar | Reducing Comerica's FVE to $78 Due to Rate Sensitivity
Narrow-moat rated Comerica reported decent second-quarter results, but with rate cuts seemingly imminent, we see more negatives than positives in Comerica’s story at the moment. The bank reported an 8.3% decline in net income after the bank charged off a few energy loans. Despite the decline in net income, earnings per share grew 3.7% to $1.94 due to a reduced share count and return on equity came in at 16.4%. Net interest income grew modestly year over year at 2.2% and noninterest income was essentially flat. We were concerned to see a substantial, 16-basis-point increase in interest-bearing deposit costs during the quarter. We'll note, the bank had to purchase $1 billion in brokered deposits to support loan growth. Comerica continues to deliver on its cost-cutting measures and reduced non-interest expenses by 5.4%. We think that rate cuts are the most important issue for Comerica going forward. Since about 90% of the bank’s loans are priced on short-term rates such as LIBOR or prime rate, declining rates would directly reduce interest income. We are now incorporating three rate cuts into our forecast and expect net interest income to decline by 7%-8% due to this. Following this tempered revenue forecast, we are decreasing our fair value estimate for Comerica to $78 per share.While we are concerned about rising credit costs, we think that the commercial energy charge-off is likely to be a one-off event given the recovery in the oil sector, and we don't see any serious risk here for Comerica. Credit costs outside the energy portfolio were under control.
Management highlighted strong loan demand across their client base, particularly within their commercial loan book. We think that Comerica’s advisor-style relationship with small and midsize businesses will allow the company to continue growing over the medium term.
Comerica is a financial holding company, engaged in lending to and accepting deposits from businesses and individuals. The company's segments are: Business Bank, which provides commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services; Retail Bank, which provides consumer lending, consumer deposit gathering and mortgage loan origination; and Wealth Management, which provides products and services consisting of fiduciary services, private banking, retirement services, investment management and advisory services, investment banking and brokerage services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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