With a rising rate environment now on the horizon, Comerica should see its profits materially increase

Business Strategy and Outlook

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica’s largest, with roughly one third of the bank’s loans now based there.

The bank has concentrations in the commercial real estate market, dealer floor plan lending, and mortgage banking. Comerica has a relatively small energy portfolio, which is likely to remain at 5% or less of the total loan book. The bank also has two business units primarily focused on serving institutional investors; the technology and life sciences unit and the equity fund services unit. Overall, the bank has a diversified set of commercial-focused lending and advisory segments.

Comerica remains very leveraged to interest rates, as the vast majority (roughly 80%) of its loans are adjustable rate, making the bank one of the most interest-rate-sensitive names. This, combined with the bank’s sticky deposit base from its core commercial clients, makes the bank ideally positioned for rising rates. The flip side of this business model is that the bank can be more pressured during extended periods of low rates. With a rising rate environment now on the horizon, Comerica should see its profits materially increase. It is foreseen Comerica will be one of the biggest beneficiaries of this rate backdrop. Comerica’s overall strategy of adding value through its deep, advisor-style relationships with small and midsize business clients is appreciated. Fee streams related to payments and wealth management will also help the bank outlearn its cost of capital over the long term.

Financial Strength

It is held Comerica is in good financial health. While losses from the energy portfolio ticked up in 2016 and again in 2020, the bank has managed the costs well and has shown that the risks are well managed. The common equity Tier 1 ratio has generally been above the bank’s 10% goal, which is viewed to be an appropriate target.

Bulls Say’s

A strong economy and higher rates are all positives for the banking sector and should propel revenues and profitability even higher. This is particularly true for Comerica, which has uniquely high-rate sensitivity.
A healthy business environment should uniquely benefit Comerica’s loan growth compared with many peers, as the bank almost exclusively focuses on commercial business, not retail.
The bank’s superior commercial relationships are hard to replicate and lead to a good deposit base, increasing the value of the Comerica banking franchise.

Company Profile

Comerica is a financial services company headquartered in Dallas. It is primarily focused on relationship-based commercial banking. In addition to Texas, Comerica’s other primary geographies are California and Michigan, with locations also in Arizona and Florida and select businesses operating in several other states as well as Canada.

(Source: MorningStar)

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