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Comerica (CMA) Aided by NII & Loan Growth Amid Cost Woes

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Comerica Incorporated (CMA - Free Report) is well-poised to benefit from the expected rise in net interest income (NII), backed by high interest rates and decent loan growth. A solid liquidity profile backs the company’s capital distribution activities. However, elevated expenses, along with geographic concentration, remain near-term concerns.

Comerica’s income-generation capability relies heavily on its loan growth. The total loans witnessed a four-year compound annual growth rate (CAGR) of nearly 1% (ended 2023). Although the metric witnessed a decline in the first quarter of 2024 on the back of balance sheet management, a robust loan pipeline will support growth in the upcoming quarters. Though the company’s exit from the mortgage finance business is likely to weigh on loan growth, decent loan demand is likely to keep the growth trend stable.

Improvement in Comerica’s NII over the years supported top-line growth. The metric witnessed a four-year CAGR of 1.8% (ended 2023). Further, the net interest margin (NIM) has steadily expanded in the past few years. In 2023, NIM was 3.06%, rising from 3.02% in 2022 and 2.21% in 2021. The improvement in both metrics was driven by a high interest rate environment. Although the NIM and NII declined in first-quarter 2024, higher yield and reduced notional on swaps and securities and a high interest rate regime are expected to drive NII and NIM growth. Nonetheless, swap and securities attrition are expected to create a tailwind for NII and NIM into 2025.

CMA’s focus on enhancing operational efficiency and reinvesting in strategic growth will drive future earnings power. The company had closed numerous banking centers and realigned corporate facilities. It has streamlined managerial layers, eliminated positions and made efforts for product optimization. The execution of these initiatives will reduce expenses and improve return on equity (ROE). In fact, the company’s ROE of 16.51% compared favorably with 11.80% of the industry, reflecting its superiority in terms of utilizing shareholders’ funds.

As of Mar 31, 2024, the company’s total debt (comprising short-term borrowings and medium and long-term debt) aggregated $7.12 billion. The company’s total liquidity capacity was $43.5 billion as of the same date. With decent cash levels, its capital distribution activities seem sustainable.

CMA currently carries a Zacks Rank #3 (Hold). The stock has gained 18.1% in the past year compared with the industry’s growth of 37.9%.

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Despite the tailwinds mentioned above, the company’s non-interest expenses witnessed a CAGR of 7.9% over the last four years (2019-2023), with the uptrend continuing in first-quarter 2024. With expenses likely to continue increasing in the forthcoming period, CMA’s bottom line may be negatively impacted in the near term. Management expects adjusted expenses to rise 3% in 2024.

Though Comerica is trying to diversify its geographical footprint, it has significant business exposure in California and Michigan, where the economic environment has been increasingly challenging in the past few years. Such geographic concentration makes the company vulnerable.

Stocks Worth Considering

Some better-ranked bank stocks worth a look at are Central Pacific Financial Corp (CPF - Free Report) and Northrim BanCorp, Inc. (NRIM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks Rank #1 stocks here.

The Zacks Consensus Estimate for CPF’s current-year earnings has been revised 1% upward in the past 60 days. Central Pacific Financial’s shares have gained 1.7% in the past six months.

The Zacks Consensus Estimate for NRIM’s current-year earnings has been revised 12.2% north in the past 60 days. Northrim’s shares have lost 1.5% in the past six months.

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