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Still Neutral on Comerica

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We retain our Neutral recommendation on Comerica Inc. (CMA - Free Report) based on its fundamentals and the current economic environment.

After reporting encouraging results in the first two quarters of 2012, Comerica came up with impressive third quarter earnings, comfortably beating the Zacks Consensus Estimate.

Comerica reported third quarter 2012 adjusted earnings of 69 cents per share, beating the Zacks Consensus Estimate of 65 cents. Quarterly results reflected growth in its average loans, aided by higher average commercial loans. Average deposits also advanced in the quarter. Further, a stable credit quality continued to be a positive. Yet, a decline in the top line and increasing expenses were the negatives.

Going forward, we believe that continuous geographic diversification beyond the company’s traditional and slower-growing Midwest markets could drive growth over the next cycle. Revenue synergies from the Sterling acquisition should augment its top line.

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. Following the Federal Reserve’s consent for its capital plan, the company hiked its quarterly cash dividend by 50%. Moreover, it has authorized the repurchase of additional shares of common stock (by about 6 million shares) to execute its capital plan.

Notably, the share repurchases, combined with increased dividend resulted in a total payout of 89% of net income to shareholders (excluding the third quarter restructuring charge) in the third quarter. We expect such activities to boost investors’ confidence in the stock.

Yet, an unsettled economic environment, regulatory overhangs and a pressure on net interest margin continue to be our concerns. With heightening competition, shift in the portfolio mix towards lower yielding loans as well as lower reinvestment rates for the securities portfolio, net interest margin is likely to continue to be pressurized in the quarters ahead.

Regulatory issues with respect to capital also remain a headwind going forward. While the financial reform law is likely to cap the company’s profitability from increased costs and fee restrictions, we believe that stricter capital norms and increased reserves that the regulators are proposing to align with the global standards, is likely to restrict the company’s flexibility with respect to business investments in the medium term.

Therefore, we believe that the risk-reward profile for Comerica is currently balanced. Hence, we have reaffirmed our Neutral recommendation on the stock. Comerica currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Among its peers, Fifth Third Bancorp (FITB - Free Report) and M&T Bank Corp. (MTB - Free Report) also have a Zacks #3 Rank.

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