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 very low-cost deposit base. In addition, the Company typically generates strong financial results, especially during times of higher interest rates given their asset sensitive balance sheet. Additionally, the ratings also consider the Company’s proven conservative credit risk management. Comerica’s somewhat less diversified loan portfolio and lower-than-peer levels of fee income are also factored into the ratings. Also considered is the more challenging environment for deposit gathering, the level of unrealized losses in the investment securities portfolio and the potential impact on earnings and capital in the unlikely scenario that those losses are realized.
Over the longer term, increased scale of the franchise, including greater revenue diversity, while maintaining a similar risk profile, would result in an upgrade of the ratings.
Conversely, the inability to retain customers or a sufficient amount of lower cost deposits, leading to markedly higher funding costs or a perceived weakening of the franchise would lead to a ratings downgrade. Additionally, a sustained deterioration in asset quality, or prolonged negative operating leverage, would also lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
Headquartered in Dallas, Comerica operates a relationship-focused commercial banking franchise primarily in middle-market lending, as well as a few industry verticals. While the bulk of its loan and deposit franchise is focused on its three main 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 were strong in 1Q23, as credit costs remained low and net interest income increased by 55% compared to 1Q22 as the Company’s net interest margin benefitted from higher interest rates. For 2022, the Company reported strong returns on assets and equity of 1.32% and 18.63%, respectively. Specifically, Comerica reported $1.15 billion of net income in FY22, down slightly from $1.17 billion in FY21, which benefited from substantial reserve releases.
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 net charge-offs of just 3 basis points in 2022 and a modest recovery in 1Q23. However, going forward, we expect asset quality to weaken somewhat from the currently unsustainably low levels and the Company has been modestly building its allowance for credit losses.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Comerica’s funding and liquidity remains solid, supported by its deposit base, which is comprised of a considerable amount of noninterest-bearing balances (53% of total deposits), providing one of the lowest cost of funds in the industry. A large percentage of deposits are uninsured, however, which has made Comerica more vulnerable to deposit outflows in the current environment. However, the loan to deposit ratio of 85% remains better than pre-pandemic levels. We view Comerica as having sufficient access to liquidity to offset a potential decline in deposits, as well as the earnings power to absorb higher funding costs, if needed.
Capitalization Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar considers Comerica’s capital levels, including its CET1 ratio of 10.12% at March 31, 2023 as sound, and modestly above its internal target of 10.0%. The CET1 ratio had a 312 basis points above the 7% regulatory requirement. Comerica’s recently quite robust earnings equates to strong capital generation capabilities.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415692
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Banks and Banking Organizations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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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