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Ratings of Commerce Bancshares, Inc. (CBSH - Free Report) and its subsidiaries have been affirmed by Moody’s Investors Service, a rating arm of Moody’s Corporation (MCO - Free Report) . The outlook for the company remains ‘Stable.’

Commerce Bancshares’ non-cumulative preferred stock rating remains ‘Baa1(hyb).’ Further, the long-term and short-term deposits ratings of its main banking subsidiary, Commerce Bank have been affirmed at ‘Aa2’ and ‘Prime-1’, respectively.

Why Commerce Bancshares’ Ratings were Affirmed?

The ratings were affirmed as Moody’s found improving asset quality at Commerce Bancshares. Per the rating agency, the company’s asset quality has been constantly improving over the last few years, mainly driven by “conservative underwriting and risk management practices.” Also, the company’s credit quality is supported by diversified loan portfolio and reasonable risk concentration.

Further, the ratings affirmation reflects Commerce Bancshares’ strong capital and liquidity positon. This is based on the company’s earnings strength and modest share repurchases. Additionally, its loan portfolios are fully funded by its solid core deposits as well as significant liquid assets.

While revenue growth at Commerce Bancshares remained challenged owing to the low interest rates (similar to other U.S. banks), its fee income has been growing. Specifically, the company’s income from card products and deposits and trust account is persistently rising. The rating agency added that with rising rates, the company’s top line should increase further.

Moreover, Commerce Bancshares’ profitability gets support from cost control and slight provisions for loan losses. Per Moody’s, the company’s net income/tangible assets ratio has remained between 1.1% and 1.2% over the last several years.

The stable outlook reflects the rating agency’s anticipation that the company will maintain its robust asset quality over the next two years.

Why Ratings Revision Could Occur?

The ratings can improve if Commerce Bancshares enhances its capital base and strengthens profitability. However, in case the company’s expanding loan portfolio increases its risk profile and/or its capital position weakens, then the ratings might be revised downward.

Our Take

Commerce Bancshares’ efforts to expand its footprint in newer markets, improving rate scenario and potential lesser regulations are expected to support top-line growth. Hence, this will definitely bolster its profitability further.

Shares of Commerce Bancshares have gained 25.5% in the last one year, underperforming the Zacks categorized Midwest Banking industry’s rally of 36.6%. For the current year, the Zacks Consensus Estimate has remained stable in the last 30 days. As a result, the stock currently carries a Zacks Rank #3 (Hold).

A couple of stocks in the same space worth a look include UMB Financial Corporation (UMBF - Free Report) and Old National Bancorp (ONB - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for UMB Financial was revised marginally upward for the current year, in the last seven days. The company’s share price has increased 40.4% in the last one year.

Old National Bancorp witnessed a slight upward earnings estimate revision for the current year, in the last seven days. Its share price has increased 42.7% in the last one year.

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