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

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 all ratings at the Bank have been revised to Stable from Negative. 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 return of the trend to Stable from Negative reflect that the economic fallout from the Coronavirus Disease (COVID-19) pandemic and volatile energy prices has been manageable and significant credit losses are not expected to materialize in Comerica’s portfolio. However, the operating environment remains challenging and reserve building and the impact of low rates has negatively impacted revenues and returns are likely to remain below robust pre-pandemic levels over the intermediate term.

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 peers are also factored into the ratings.

RATING DRIVERS
Over the longer term, greater revenue diversity, including growing fee income levels, while maintaining a strong balance sheet and strong-risk-adjusted returns, would result in an upgrade of ratings. Conversely, sustained deterioration in asset quality, or prolonged negative operating leverage, would lead to a downgrade of ratings.

RATING RATIONALE
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. Comerica’s operating strategy usually creates robust returns, however, Comerica’s returns were adversely impacted by the economic environment and low rates, as the Company built reserves and reported a sharp drop in its net interest margin. Returns did stabilize in 2H2020, although at a lower level, as most of the reserve building was completed and the net interest margin stabilized. Specifically, the Company’s 2H2020 return on assets was a solid 1.00%, while the return on equity was almost 11%. Additionally, Comerica’s current asset quality metrics are sound, with highly manageable levels of non-performing loans and a net charge-off ratio of 0.38% in 2020. However, going forward, we expect asset quality to weaken somewhat although current reserve levels should provide a sufficient cushion.

Comerica’s funding and liquidity remains solid, supported by its sizable and growing deposit base, which is comprised of a considerable amount of noninterest-bearing balances (54% of total deposits at YE2020), providing one of the lowest cost of funds in the industry. DBRS Morningstar considers Comerica’s capital levels, including its CET1 ratio of 10.3% at YE2020 as sound. Comerica is expected to resume buybacks to manage capital levels once the economic outlook becomes clearer, targeting a 10.0% CET1 ratio. Comerica had previously suspended share repurchases in March 2020.

Comerica, a diversified financial services company headquartered in Dallas, reported $88.1 billion in assets at December 31, 2020.

ESG CONSIDERATIONS

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.

The Grid Summary Grades for Comerica are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile –Strong/Good; Funding & Liquidity – Strong; Capitalization – 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 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include 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.

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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