We are reaffirming our long-term Neutral recommendation on Comerica Inc. (CMA) based on its fundamentals and capital redeployment measures amidst the current stressed macroeconomic environment.
After reporting encouraging results in the first quarter of 2012, Comerica yet again came up with an impressive second quarter. The company reported earnings per share of 73 cents. Excluding restructuring expenses, earnings came in at 76 cents per share, comfortably beating the Zacks Consensus Estimate of 62 cents.
Comerica's results reflect growth in its top line. The company experienced strengthening of its average loans, helped by higher average commercial loans. Average deposits also advanced in the quarter. However, lower loan yields partially offset the benefit. Furthermore, the company experienced augmentation in its fee income. Additionally, expenses were well-controlled.
Going forward, we believe that continuous geographic diversification beyond Comerica’s traditional and slower-growing Midwest markets could drive growth over the next cycle. Revenue synergies from the Sterling acquisition should augment its top-line growth.
Comerica’s capital deployment initiatives through dividend payment and share buybacks are significant of its capital strength. During the second quarter of 2012, the company hiked its quarterly cash dividend by 50% and authorized repurchase of additional shares of common stock to execute its capital plan. Moreover, its solid balance sheet and commitment to capital adequacy are encouraging.
However, with increasing competition, shift in the portfolio mix towards lower yielding loans as well as lower reinvestment rates for the securities portfolio and reduced accretion from the Sterling acquisition, net interest margin is likely to continue to be pressurized in the quarters ahead.
In addition to this, the unsettled economic environment along with regulatory issues are likely to adversely impact and temper its robust growth prospects. Hence, the risk-reward profile seems balanced for Comerica and therefore our long-term Neutral recommendation is reiterated.
However, Comerica currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. One of its closest peers, Fifth Third Bancorp (FITB) has a Zacks #3 Rank, implying short term a Hold rating.
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