DBRS Morningstar Confirms Comerica Incorporated at ‘A’; Trend Revised to Negative

DBRS, Inc. (DBRS Morningstar) 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 Morningstar confirmed the ratings of its primary banking subsidiary, Comerica Bank (the Bank). The trend for all long-term ratings at the Company and long and short-term ratings at the Bank has been revised to Negative from Stable. The short-term ratings at the Company have been confirmed at R-1 (Low) with a Stable trend. 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 Negative trend reflect the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which has already pressured the operating environment and will likely negatively impact revenues and asset quality. In particular, we expect higher loan loss provisions and pressure on the net interest margin, which will reduce the Company’s profitability. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which, in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

The confirmation of Comerica’s ratings 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 conservative credit risk management and solid 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. DBRS Morningstar notes that Comerica’s exposure to energy related loans has declined although energy loans still represent approximately 4.5% of the loan portfolio at YE19.

RATING DRIVERS
Given the Negative trend, an upgrade of the ratings is not currently anticipated. However, DBRS Morningstar could revise the trend back to Stable if the economic fallout from the coronavirus and low energy prices is not prolonged and out-sized credit losses do not materialize. Conversely, a prolonged adverse impact of the coronavirus resulting in a sustained deterioration in asset quality, or prolonged negative operating leverage, could result in a downgrade of the ratings.

RATING RATIONALE
Comerica is entering into this downturn from a position of strength. Specifically, the Company reported strong 2019 results including a return on assets of 1.68%, 16.4% return on equity and 51.8% efficiency ratio. Additionally, Comerica’s current asset quality is strong, with a net charge-off ratio of 0.21% in 2019. However, going forward, we expect both earnings and asset quality to come under significant pressure.

Comerica’s funding and liquidity remains solid, supported by its sizable deposit base, which is comprised of a considerable amount of noninterest-bearing balances (47% of total deposits), providing one of the lowest cost of funds in the industry. Additionally, Comerica’s CET1 ratio was 10.1% at December 31, 2019, which DBRS Morningstar considers sound, particularly given the Company’s risk profile. Positively, we note that Comerica has suspended share repurchases to protect capital in today’s adverse and uncertain economic environment.

Comerica, a diversified financial services company headquartered in Dallas, reported $73.4 billion in assets at December 31, 2019.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades 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 principal methodology is the Global Methodology for Rating Banks and Banking Organisations, June 11, 2019 (https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations), which can be found on our website under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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