Risk-Reward Balance Comerica - Analyst Blog
June 21 2011 - 12:43PM
Zacks
We have reiterated our
Neutral recommendation on Comerica Inc. (CMA). The reaffirmation follows a detailed
analysis of the company’s fundamentals following first quarter 2011
earnings, along with an evaluation of the current economic
environment, its strengths, opportunities, weaknesses and
acquisition efforts.
Comerica’s first quarter
net income of 57 cents per share outpaced the Zacks Consensus
Estimate of 48 cents and improved from the prior-quarter figure of
53 cents. The quarter’s earnings saw a striking year-over-year
improvement from a loss of 46 cents.
The year-over-year
improvement reflected an increase in non-interest income and net
interest margin, partially offset by higher non-interest expenses
and a lower net interest income. Furthermore, a significant
improvement in credit quality also acted as a positive
catalyst.
Concurrent with the fourth
quarter 2010 earnings release, Comerica announced that it would
acquire Sterling Bancshares Inc.
(SBIB) in a stock-for-stock transaction. The
strategic acquisition will augment Comerica's growth in Texas from
the current 95 banking centers to 152.
The takeover
will also give Comerica 65 banking centers in Houston, 63 in
Dallas/Fort Worth, 13 in San Antonio and 11 in Austin.
Additionally, the acquisition will add about $3.0 billion in loans
and $4.0 billion in deposits.
According to management,
Comerica continues to be on track to close its pending acquisition
of Sterling Bancshares in the second quarter, subject to customary
closing conditions. Management expects to complete the systems
conversion in the fourth quarter, and anticipates a smooth and
seamless transition.
Going forward, we expect
Comerica to enjoy business expansion not only from acquisitions but
also from an overall improvement in the economy. Moreover, its
business model positions it well to benefit from an eventual rise
in interest rates in the second half of 2011.
Comerica also boosted
investors’ confidence by doubling dividend and authorizing a share
repurchase in the fourth quarter of 2010. Management expects to
continue the share repurchase program, which coupled with dividend
payments would result in a payout of up to 50% of earnings for
full-year 2011.
Yet Comerica’s significant
exposure to the riskier areas, such as commercial real estate
markets, lack of meaningful loan growth and regulatory headwinds
are the downsides. We remain concerned about the company’s growth
prospects. Loan growth has clearly moderated over the past year,
and growth in fee income remains restricted.
Moreover, we expect the
recent regulatory moves and a sluggish economic recovery to
restrain fee income. These are also reflected in the guidance for
full-year 2011, which includes management’s assumption of a
single-digit decline in non-interest income from 2010.
Market-related fees are also expected to be lower as customers
remain cautious in a sluggish and still uncertain economic
environment.
Hence, the positive and
negative seem balanced for the stock and the Neutral recommendation
is retained. Additionally, shares of Comerica currently retain the
Zacks #3 Rank, which translates into a short-term Hold
rating.
COMERICA INC (CMA): Free Stock Analysis Report
STERLING BCS-TX (SBIB): Free Stock Analysis Report
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