Fitch Affirms Comerica's L-T IDR at 'A' Following Large Regional Bank Review; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed Comerica Incorporated's (CMA) ratings at 'A/F1'. The Rating Outlook remains Negative. The affirmation reflects the bank's solid capital position, conservative risk culture, and consistent financial performance.

The rating action follows a periodic review of the large regional banking group, which includes Comerica Incorporated (CMA), BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

Fitch has affirmed CMA's ratings supported by the company's solid tangible capital base, strong funding profile, proven credit performance through various credit cycles and consistent performance. That said, CMA's ratings are sensitive to a prolonged period of low oil prices given that it has a relatively larger energy exposure when compared to large regional peers. Further, in Fitch's view, CMA's earnings profile continues to lag peers. The company's balance sheet mix is much more sensitive to the prolonged low rate environment, which has produced weaker financial measures versus the large regional peer group.

CMA's ratings also reflect the company solid franchise and conservative approach to underwriting which has been demonstrated through various credit cycles. Similarly to its large regional peer group, CMA experienced credit challenges however its asset quality performance was better than peers. Further, CMA has a solid funding profile with a good amount of non-interest bearing deposits, which are currently undervalued given the low rate environment.

The Negative Outlook reflects Fitch's view that CMA's financial performance will face greater pressure than other large regional peers given continued low rate environment as well as its relatively higher exposure to energy lending. More recently, capital measures are falling in-line with large regional peer group, which were viewed as an offset to its relatively weaker earnings profile. Further, the company has experienced credit pressures stemming from its sizeable energy portfolio, which has led to a jump in provisioning needs.

CMA's earnings continue to lag regional peers given the prolonged low rate environment and slow recovery in the economy. Although Fitch recognizes that CMA's earnings performance is consistent, its earnings profile remains on the lower end compared to most peers. CMA's return on assets (ROA) has averaged 0.80% over the last five years versus the large regional peer average of 1.06%. CMA's pre-provision net revenue (PPNR)/average assets was 1.27% for 2015 compared to 1.44% for 'A' rated banks and 1.71% for the large regional peer group. Further, financial performance has been pressured during the last five sequential quarters as CMA's provisions rose significantly to address credit issues within its sizeable energy portfolio.

CMA recognizes its earnings growth challenge and has recently announced cost save initiatives, which are expected to improve earnings into 2017 and 2018. Management has identified $230 million in annual pre-tax income for fiscal 2018, which should bring efficiency ratio down below 60%. These revenue and expense initiatives are expected to contribute 200 basis points (bps) to return on equity (ROE). Fitch would view positively the successful execution of these strategies and achieving the noted targets.

The Negative Outlook also reflects higher than expected asset quality deterioration and we expect CMA's financial performance will face greater pressure than other large regional peers given its relatively higher exposure to energy lending. CMA's funded energy loans as a percent of tangible common equity (TCE) is roughly 39% at second quarter 2016 (2Q16), compared to the 13% average for the large regional peer group. CMA's energy and indirect energy loans totaled 5.4% of total loans at 2Q16. Positively, CMA has continued to reduce its energy exposure. More recently, energy prices have stabilized and appear to be at an equilibrium point. This should help reduce CMAs inflows of criticized/classified credits. Nonetheless, energy prices are expected to remain well below peak levels for some time. Uncertainties remain as to the ability of energy borrowers to navigate through the new price point, particularly as hedging protection starts to roll-off. Moreover, any further and sustained declines in oil prices will likely lead to more deficiencies in E&P borrowing bases. This could create further challenges for these energy borrowers which ultimately lead to higher loss content than initial estimates.

Fitch also notes that credit deterioration in the energy book is trending higher than historical experience relative to previous energy cycles, which was a key rating sensitivity highlighted in Fitch's rating affirmation in October 2015. CMA disclosed that net charge-off (NCO) averages for its energy book peaked at 69bps in 2009. For the year-end 2015 (4Q15), based on the company's public information, annualized NCOs in the energy book were roughly 1.2%.

Further, the company's capital position, while still solid given its risk profile has started to trend in line with the large regional peer group. For 2Q16, CMA's CET1 ratio was 10.40%, which slightly lags the large regional peer group average by about 40bps. Given expectations for credit and modest earnings for CMA, Fitch believes capital levels may trend down closer to peer averages also pressuring the rating.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

CMA's subordinated debt is notched one level below its VR for loss severity. CMA's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while CMA's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of Comerica Bank are rated one notch higher than CMA's Issuer Default Rating (IDR) and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

CMA's IDR and VR are equalized with those of its operating companies and bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

CMA has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CMA is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT

CMA's ratings are at the high end of its rating potential and therefore further upside is unlikely.

Fitch considers CMA's ratings to be sensitive to its ability to control losses in its energy book and improve its long-run profitability. In assessing this, Fitch will focus on the impact, if any, of higher credit costs on profitability, trends in credit performance, and its capital position, including CET1 ratio, relative to its large regional peer group. The revision to a Negative Outlook also reflects our view that over the Outlook horizon, typically between 12-18 months, CMA's credit performance will likely deteriorate more than its peers given the company's relatively larger exposure to energy. Although Fitch believes the company has a long history in energy lending and a proven track record through various economic downturns, the significant decline in oil prices and slow recovery may lead to a sharper rise in NPAs and NCOs than initially expected.

Should credit costs increase significantly and rise above normalized ranges and continue to pressure earnings measures, ratings could be downgraded by one notch. CMA's 10-year-average NCO ratio is 62bps. We note that solid asset quality and capital were considered offsets to the company's modest earnings profile.

Although not anticipated, the ratings could be negatively affected if CMA's CET1 capital position were to fall below peer averages without a corresponding increase in core earnings. Further, a payout ratio (including repurchase activity) exceeding 100% would also put pressure on current ratings.

Fitch also notes ratings could be sensitive to strategic options that lead to changes to the company's overall business model and/or franchise.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for CMA's and its operating companies' subordinated debt and preferred stock are sensitive to any change to CMA's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long-and short-term deposit ratings are sensitive to any change to CMA's long-and short-term IDR.

HOLDING COMPANY

Should CMA's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since CMA's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

The rating actions are as follows:

Fitch has affirmed the following ratings:

Comerica Incorporated

--Long-Term IDR at 'A'; Outlook Negative;

--Senior shelf at 'A';

--Senior debt at 'A';

--Subordinated debt at 'A-';

--Viability at 'a';

--Short-Term IDR at 'F1';

--Short-term debt at 'F1';

--Support at '5';

--Support floor at 'NF'.

Comerica Bank

--Long-Term IDR at 'A'; Outlook Negative;

--Subordinated debt at 'A-';

--Senior debt at 'A';

--Long-term deposits at 'A+';

--Viability at 'a';

--Short-Term IDR at 'F1';

--Short-term Deposits at 'F1';

--Support at '5';

--Support floor at 'NF'.

Additional information is available at www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012644

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Contacts

Fitch Ratings
Primary Analyst
Doriana Gamboa, +1-212-908-0865
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar, +1-312-368-5472
Senior Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com