TEXT-Fitch affirms Comerica's IDRs at 'A/F1'
July 26 - Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Comerica, Inc. (CMA) and its subsidiary Comerica Bank at 'A/F1'. A complete list of ratings is provided at the end of this release. The Rating Outlook has been revised to Negative from Stable. Fitch believes CMA's financial performance may continue to lag peers given the prolonged low rate environment and weak economy. Although CMA's earnings performance improved year-over-year, profitability measures continue to fall on the lower end when compared to 'A' rated financial institution and large regional peers. CMA's PPNR/Avg assets for 1Q'12 was 1.34% versus an average of 1.62% for similarly rated peers (excluding Citigroup & Bank of America) and an average of 2.00% for large regional peers. Other financial measures such as NIM and ROA also fall below peer averages. Historically, CMA's asset sensitive balance sheet is typically impacted by changing rates given the sizeable mix of Commercial & Industrial (C&I) loans. However, in Fitch's view, CMA's financial measures will lag peers for a longer-time horizon than initially expected given the challenging operating environment. Over the past few years, earnings have largely benefited from improved credit performance, which has led to reserve release. As credit measures return to normalized levels, Fitch believes credit cost improvements will likely be nominal. Fitch also notes that CMA's earnings measures include the positive impact from accretable yield related to the Sterling acquisition. This benefit is also expected to decline as these loans continue to mature. The overall loan yield has been negatively impacted by the decrease in higher-yielding Commercial Real Estate (CRE) loan balances offset by new loan originations at lower pricing. Fitch believes that competition for C&I loans is intense throughout the industry, which may also be pressuring current yields. Positively, CMA has a long history of C&I lending and it is expected it will continue to maintain its pricing and underwriting discipline. The rating affirmation primarily reflects CMA's above-peer tangible capital base, improved fundamentals such as asset quality performance and funding profile. Capitalization levels are considered a rating strength. Fitch believes CMA's high level of tangible capital is prudent given the relatively higher risk earning-asset base. The company has always had a large concentration of C&I loans, which is roughly 56% of total loans. It is the highest by a wide margin when compared to large regional peers, which on average C&I accounted for 23% of total loans. The rating affirmation also incorporates CMA's current capital deployment strategies. However, Fitch believes CMA's approach will be cautious given economic uncertainties. Further, the company's capital targets have historically included above-average capital ratios, which management has indicated will continue. At 1Q'12, TCE ratio was 10.21% and Fitch Core Capital totaled 9.76%, which is among the highest for large U.S. banks. Despite a relatively high payout ratio (including buyback activity and common dividends) of roughly 80% for 2Q12, CMA reported a strong TCE and Tier 1 Common ratio of 10.27% and 10.32% at June 30, 2012, respectively. CMA estimates that under Basel III, Tier 1 Common ratio would be in the range of 9.30% - 9.40%, roughly a 90-100bps negative impact. Of note, CMA's capital base is comprised of 100% common equity, which positions the company well to comply with Basel III requirements. Fitch considers the loan mix to be higher-risk given the sizeable commercially oriented loans, which are typically more susceptible to economic downturns. During the recent credit downturn, the company's core earnings remained stable and helped absorb higher credit costs as pre-provision net revenue (PPNR) to net charge-offs (NCOs) averaged 3x over the last six quarters. Similar to others in the industry, CMA has faced credit quality challenges, but performance has been relatively good to date, reflecting the predominately commercial composition of the loan book. Credit trends may be reaching normalized levels as NCOs totaled 0.47% and NPAs totaled 1.85% for 2Q'12. Fitch recognizes that during this credit cycle, corporate performance (excluding those with ties to real estate related investments), in general, has fared much better compared to past credit cycles. Further, Fitch views CMA strong capital base as providing additional support for unforeseen future losses. CMA's funding profile is solid as non-interest bearing deposits accounted for 43% of total deposits, which is an improvement from 39% same period a year ago. Further, the company's franchise is considered strong given its good market share of #2 in Michigan with about 12% of total deposits. Positively, CMA has also improved its leverage position by reducing its debt and wholesale borrowings from historically higher levels. Rating Sensitivities: Ratings will likely be downgraded by one notch should earnings continue to lag both regional and similarly rated peers. Although not anticipated, ratings could also be negatively affected if CMA were to reduce capital below peer averages while maintaining similar loan mix within a relatively short-time frame. Further, a payout ratio (including repurchase activity) exceeding 100% would also put pressure on current ratings. Fitch would review the Negative Outlook should CMA's financial measures improve to peer averages on a sustainable basis. Headquartered in Dallas, TX, CMA is one of the top 20 largest banking companies in the U.S with $62.7 billion at June 30, 2012. CMA's primary operations are in MI, CA, TX, FL and AZ, with select businesses operating in several other states as well as in Canada and Mexico. CMA's three business segments include: The Business bank, The Retail bank and Wealth Management. Fitch has affirmed the following ratings with a Negative Outlook: Comerica Incorporated --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Senior debt at 'A'; --Subordinated debt at 'A-'; --Short-term debt at 'F1'; --Viability at 'a'; --Support at '5'; --Support floor at 'NF'. Comerica Bank --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Subordinated debt at 'A-'; --Long-term Deposits at 'A+'; --Short-term Deposits at 'F1'; --Viability at 'a'; --Support at '5'; --Support floor at 'NF'. Fitch has withdrawn the following ratings: Sterling Bank (Texas) --Long-term Deposits 'A+'; --Short-term Deposits 'F1'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 16, 2011); --'Bank Holding Companies' (Aug. 16, 2011). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Bank Holding Companies