On Jun 17, 2013, we reiterated our Neutral recommendation on Comerica Incorporated (CMA) based on its better-than-expected first-quarter results and continuous geographic diversification beyond the company’s traditional and slower-growing Midwest markets. However, we are concerned about the unsettled economic environment, regulatory overhangs and a pressure on the net interest margin.
Why Neutral?
Comerica’s first-quarter earnings of 70 cents per share beat the Zacks Consensus Estimate by 3 cents. Better-than-expected results reflected reduced expenses. Further, growth in average loans and improved credit metrics were the positives.
Despite the macro pressure, Comerica’s credit quality continues to normalize. Credit metrics have been gradually improving since 2009 and continued into first-quarter 2013. Further, we are impressed by the overall improvement in net charge-offs. This trend is expected to continue, thereby providing room to drive future earnings.
Moreover, we view Comerica as a sound asset for yield-seeking investors. In Mar 2013, following the release of the Federal Reserve’s stress test results, the company received approval for its capital plan and capital distributions. Notably, the share repurchases, combined with dividends resulted in a total payout of 77% of net income to shareholders in first-quarter 2013.
Following the first-quarter results, the Zacks Consensus Estimate for 2013 advanced by a penny to $2.79 per share over the last 60 days. The Zacks Consensus Estimate for 2014 also increased by a penny to $2.82 per share over the same time frame. Hence, Comerica carries a Zacks Rank #2 (Buy).
However, with increasing competition, shift in the portfolio mix toward lower yielding loans and lower reinvestment rates for the securities portfolio remain concerns. Therefore, net interest margin is likely to continue to be pressurized in the quarters ahead. Further, the continuous effect of a low interest-rate environment, coupled with a decline of $40–$50 million in purchase accounting accretion, is anticipated to lead to a lower net interest income in the upcoming quarters.
Some Major Companies to Consider
Besides Comerica, other major banks that are worth considering include JPMorgan Chase & Co. (JPM), KeyCorp. (KEY) and The PNC Financial Services Group, Inc. (PNC). All 3 companies carry a Zacks Rank #2.
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