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 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 well-established, leading middle-market commercial lending franchise that is supported by a stable, very low-cost deposit base. Overall, earnings have been fairly resilient and benefited from reserve release in recent periods. Earnings should also benefit in 2022 from both higher interest rates, as well as loan growth. Additionally, the ratings consider the Company’s conservative credit risk management and solid capital levels. Comerica’s less diversified loan portfolio and lower levels of fee income contribution compared to similarly-rated peers are also factored into the ratings.
Over the longer term, further strengthening of the franchise, including greater revenue diversity, and a sustained improvement in operating earnings performance, while maintaining a similar risk profile, would result in an upgrade of the ratings. Conversely, sustained deterioration in asset quality, or prolonged negative operating leverage, would lead to a downgrade of the ratings.
Franchise Combined Building Block (BB) Assessment: Good
Headquartered in Dallas, Comerica operates a relationship-focused commercial banking franchise focused on middle-market lending, as well as a few industry verticals. While the bulk of its loan and deposit franchise is focused on its three footprint states of California, Michigan and Texas, the Company has lending relationships on a national basis in some business lines.
Earnings Combined Building Block (BB) Assessment: Strong / Good
Comerica’s business mix usually creates favorable returns and a strong net interest margin. Earnings rebounded in 2021 with reserve releases as the Company reported a strong return on assets of 1.30%, while the return on equity was over 15%. Specifically, Comerica reported $1.17 billion of net income in FY21, up materially from $497 million in FY20 when reserves were rapidly built at the onset of the pandemic.
Risk Combined Building Block (BB) Assessment: Strong / Good
Comerica’s current asset quality metrics are sound, with highly manageable levels of non-performing loans and a net loan recovery in 2021. However, going forward, we expect asset quality to weaken somewhat from these unsustainably low levels.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
Comerica’s funding and liquidity remains strong, supported by its sizable and growing deposit base, which is comprised of a considerable amount of noninterest-bearing balances (54% of total deposits), providing one of the lowest cost of funds in the industry.
Capitalization Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar considers Comerica’s capital levels, including its CET1 ratio of 10.1% at YE2021 as sound. Comerica resumed buybacks in 2021 and returned $1.1 billion to shareholders through dividends and common share repurchases, approaching its internal 10.0% CET1 ratio target.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/394742.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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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