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We reiterate our long-term “Neutral” recommendation on Commerce Bancshares Inc. ( CBSH - Analyst Report ) after a thorough review of its third-quarter 2011 earnings results. The recommendation is also based on its stable capital ratios and excellent liquidity position.
Though Commerce Bancshares’ third quarter earnings were a penny below the Zacks Consensus Estimate, it was better than the year-ago quarter’s earnings. The improvement originated from expense management initiatives and improving credit quality.
Despite rising credit costs, Commerce Bancshares continue to report stable capital ratios, which are well above the regulatory requirements. We anticipate this to act as a buffer against any future losses in its credit loan portfolio.
Additionally, Commerce Bancshares has been enhancing shareholders value through dividend payments. During the first quarter of 2011, the company hiked its quarterly cash dividend by 2.7% and maintained this over the next couple of quarters. The company also pays a 5% annual stock dividend.
Further, unlike its peer TCF Financial Corporation ( TCB - Analyst Report ) , which has not repurchased any shares since October 2007, Commerce Bancshares has been boosting its shareholders’ wealth through share buyback. During the third quarter, the company repurchased 2,175,885 shares of stock at an average cost of $38.04 per share.
On the flip side, regulatory pressure is expected to significantly bring down fees from overdraft and credit card transactions in the near to mid term. Such regulations may increase costs and limit the ability of Commerce Bancshares to pursue new business opportunities.
The company is not as geographically diversified as larger national or other regional banks. Hence, Commerce Bancshares’ success is largely influenced by the general economic conditions of the specific markets in which it operates. With less exposure in other parts of the country, the company faces substantial risk of diseconomies of scale, considering the current interest rate volatility.
Commerce Bancshares currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating.
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