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Analyst Blog

Comerica Inc. ((CMA - Analyst Report)) will be laying off 300 positions at its Houston operations from October this year, according to a report in the Business Journal that cited a letter received by Texas Workforce Commission from the company.

The job cuts, which will continue for the next six months, is a part of the company’s initiatives to integrate Sterling Bancshares Inc. – a company it acquired recently. The positions to be eliminated are primarily those that are overlapping ones.

Notably, Comerica closed the acquisition of Sterling Bancshares Inc. at the end of July. All the outstanding shares of Sterling’s common stock were taken over by Comerica in a stock-for-stock transaction. The acquired company would augment Comerica’s growth in Texas with a solid deposit base and well located branch network.

Per the agreement terms, Sterling shareholders received 0.2365 shares of Comerica’s common stock in exchange for each share of Sterling’s common stock they owned. Further, fractional shares were paid in cash.

The systems conversion is expected to be completed by the end of this year. Until then, Sterling branches and ATMs will retain their identity, while the branches will operate as a division of Comerica.

The acquisition is a strategic fit for Comerica as it would augment its Houston market share three-fold. Besides, it would enable the company to foray into the attractive San Antonio and Kerrville regions and add to Comerica's banking center network in Dallas-Fort Worth. The transaction is expected to be at break-even to Comerica's earnings in 2012 but be increasingly accretive thereafter.

Our Take

The acquisition enhances Comerica’s growth opportunities with a focus on middle market and small business. It leverages additional marketing capacity to offer a wide array of products and services through a larger distribution channel.

Such strategic expansion efforts bode well for Comerica and the jobs cuts are part of the overall efficiency improvement. Capital deployment efforts also inspire investors’ confidence in the stock. Yet, its significant exposure to riskier areas such as commercial real estate markets, lack of meaningful loan growth and regulatory headwinds are the downsides.

Comerica currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. One of the closest peers of Comerica, Fifth Third Bancorp ((FITB - Analyst Report)), also holds a Zacks #3 Rank.