Group 7, Homework 2
Kyle Carrington, Vikram Garadi, Boris Kresevic
Introduction
Comerica (CMA) is a US regional bank that operates in the Southwest but has also branched out
to Michigan and Florida. The banking sector as a whole has experienced strong growth since the 2008
financial crisis and jobs have been growing slowly but steadily as well (Bureau of Labor Statistics, 2019).
Based on our research into the strength of Comerica’s financial statements, reputation within the
banking industry, and future expectations in technology and regulation, we recommend exploring job
prospects at Comerica.
Financial Analysis
Based on our financial analysis, we have identified the following strengths and weaknesses:
Strength 1: Strong Asset Quality
As of March 2019, assets were comprised primarily of net loans (70% of total assets) and investment
securities available-for-sale (17%), with the remaining assets corresponding mainly to cash and very
short-term assets, as well as accrued income.
To assess the quality of net loans, we analyzed the % of loans in non-performing condition, as well as the
ratio of allowance for loan losses to nonperforming loans. As can be seen in the graph below,
nonperforming loans represent a very small amount of total loans (0.39% as of March 2019), and
importantly, it has been declining over the last years. On the other hand, the allowance for loan losses
represent more than three times the amount of nonperforming loans (with a positive trend), which we
think show a very conservative stance by the bank.
Regarding the investments in securities, first we note that these investments are carried at fair value on
the balance sheet (“available-for-sale” category), which means that they already reflect any gains and
losses. In the following chart we can see the composition of these investments (from Note 13 on 1Q19
financial statements):
Amortized UnrealizedUnrealized
As of March 2019
Cost
Gains
Losses
Fair Value
U.S. Treasury and US Agencies securities
2,742
19
5
2,756
Residential mortgage-backed securities
9,533
36
113
9,456
Total Invest. Securities Available-for-sale
12,275
55
118
12,212
%
23%
77%
100%
Importantly, we can see that US Treasury and Agency securities, which are highly liquid and have very
low credit risk, represent 23% of the portfolio, and the remaining 77% corresponds to mortgage-backed
securities which, as Note 13 explains, are “Issued and/or guaranteed by U.S. government agencies or
U.S. government-sponsored enterprises”. In addition, Note 13 explains that the company does not does
not intend to sell the securities if it were to realize a loss. In conclusion, these investments carry a very
low credit risk, and full collection can be expected.
Strength 2: Good Capitalization levels
The main capital ratios to which Comerica Inc. is subject to are the Common Equity Tier One (CET1)
capital ratio, the Tier 1 capital ratio, and the Total Capital ratio. We can see that the levels of these ratios
are significantly higher than the minimum required levels.
Strength 3: Low-cost funding
We can see from the balance sheet that “Noninterest-bearing deposits” represent 48.5% of total
deposits as of March 2019. This significantly reduces the amount of interest expense as a % of average
earning assets, to levels much lower than peer banks (“Peer Group 2” defined by the FDIC as Insured
commercial banks having assets between $10 billion and $100 billion):
Weakness 1: High Exposure to interest rate risk
The company discloses information regarding its interest rate risk in the Risk Management section of the
Notes to the Financial Statements, in which it indicates the percentage of its loan portfolio that have
floating interest rates:
Composition of loans by type of interest rate:
Floating rate
Predetermined (Fixed) rate
March 2019 Dec 2018
92.0%
91.0%
8.0%
9.0%
We can see that the company is highly exposed to changes in interest rates. During the last few years,
this was a positive factor behind the increase in the net interest margin and overall net income of the
holding company. However, given that there has been a recent change in expectations of the interest
rate, with the markets now pricing a reduction in the Fed Funds rate in the near term, which have had
already a big impact on the yield curve, this exposure to floating rate loans is expected to reduce
significantly its interest income.
The sensitivity analysis provided by the company shows that a reduction in 100 basis points in the
average short-term interest rates over the next 12 months (as of March, 2019) could decrease annual
net income by 12%.
Weakness 2: Low growth rate of loan portfolio
The growth in loans of Comerica Bank has been much lower than peers. This can be attributed to a very
conservative risk appetite; however, it is restraining the growth of the company.
Weakness 3: Lower capital target
Even though current capitalization levels are high as compared to minimum required levels, as shown
previously, the bank has indicated its intention to reduce its CET1 capital ratio by the end of 2019 to the
range 9.5% - 10.0%. While this means more funds will be available to be invested or returned to
shareholders, it reduced the loss absorption capacity of the bank and thus it increases its financial risk. It
is worth mentioning that the capital ratio levels, although much higher than the minimum required
levels, compare unfavorably with peer banks’.
Comerica’s Reputation
We believe the following factors affect its reputation positively:
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Important market shares in its main operating markets: Number 10 deposit market share in TX,
Number 2 in Michigan, Number 12 in California.
Long operating history in Michigan. Its origin goes back to 1849.
Number 3 pre-paid commercial card issuer
Highest concentration of C&I loans among the top 25 U.S. financial holding companies (good
business relationships)
As of March 2019, the ROE (18.44%) and ROA (1.97%) of Comerica Bank are significantly higher
than the average ratios for US Commercial Banks (ROE of 11.89% and ROA of 1.35%).
Good financial position and creditworthiness (with a strong credit rating of A3/BBB+/A by
Moody’s/S&P/Fitch):
Source: 1Q19 Earnings Presentation
Technological Changes
In a word: Cryptocurrency. This will not only affect Comerica but all the players in the finance sector
(and many more). A couple ways this will happen are (CBS Insights, 2019):
1) Payments: Payments can be made faster and with lower fees than by banks.
2) Loans and Credit: The gatekeeper (in this case a bank) is no longer needed in the loan and credit
industry. Cryptocurrency technology can make it more secure to borrow money and support
lower interest rates.
Additional Risks and Opportunities
A near-term risk in the banking sector that Comerica is sensitive to is the impact of changes in
trade to the global economy. According to a report released by the Federal Reserve in May of 2019,
trade tensions between the U.S. and China threaten to slow down or even halt the economic growth
we’ve experienced over the last several years (Federal Reserve, 2019). The uncertainty of potential
tariffs on Chinese and European goods may have the impact of discouraging long-term investment by
firms in the U.S. which would negatively impact Comerica’s commercial lending portfolio.
One potential upside in the banking sector is that there has been a recent focus on refining or
removing regulations to the banking industry that were established after the 2008 financial crisis. Some
of the existing laws under review in 2019 include changes to the Dodd-Frank Act, which would reduce
the strength of stress tests and loosen liquidity ratios for U.S. banks. This should allow banks to take
greater risks in their investment portfolios and potentially result in greater value to their shareholders
and more opportunities for expansion in their workforce (Deloitte, 2019).
Conclusion
In conclusion, we think that the bank has a good financial position and a conservative financial policy
that allows it to withstand changing market and economic conditions. This is a very important factor to
consider for a job opportunity in the company. Also, Comerica’s size and the state of the banking sector
as a whole makes for an appealing job offer. The prospect for lowered regulations in the banking
industry will certainly create new opportunities for advancement as the banks explore alternative
revenue streams.
References
Bureau of Labor Statistics. (2019, June 23). BLS.gov. Retrieved from
https://www.bls.gov/opub/ted/2016/employment-trends-and-wages-in-banking-and-creditindustries.htm
CBS Insights. (2019, June 22). Retrieved from https://www.cbinsights.com/research/blockchaindisrupting-banking/
Comerica. (2019, June 16). Retrieved from
http://investor.comerica.com/phoenix.zhtml?c=114699&p=irol-irhome
Deloitte. (2019, June 20). Deloitte. Retrieved from Deloitte:
https://www2.deloitte.com/us/en/pages/financial-services/articles/banking-industryoutlook.html
Federal Reserve. (2019, May). FederalReserve.gov. Retrieved from Financial Stability Report - May 2019:
https://www.federalreserve.gov/publications/2019-may-financial-stability-report-near-termrisks.htm
Federal Deposit Insurance Corporation (2019, June 23). Retrieved from
https://cdr.ffiec.gov/public/Reports/UbprReport.aspx?rptCycleIds=115%2c114%2c111%2c110%
2c108&rptid=283&idrssd=60143&peerGroupType=&supplemental=