The ratings of Comerica Inc. (CMA) and its subsidiary bank have been affirmed by Fitch Ratings following the completion of the Sterling Bancshares buyout. The outlook remains stable.
Last week, Comerica closed the acquisition of Sterling Bancshares Inc. (SBIB). All of the outstanding shares of the common stock of Sterling were acquired by Comerica in a stock-for-stock transaction.
Fitch has affirmed Comerica Inc.’s long-term Issuer Default Ratings (IDRs) at ‘A’; short-term IDR at ‘F1’; senior debt at ‘A’; subordinated debt at ‘A-‘; preferred Stock at ‘BBB+’; short-term debt at ‘F1’; individual at ‘B/C’; and viability at ‘a’.
Additionally, Fitch has affirmed Comerica Bank’s long-term IDR at ‘A’; short-term IDR at ‘F1’; long-term Deposits at ‘A+’; short-term Deposits at ‘F1’; senior debt at ‘A’; subordinated debt at ‘A-‘; individual at ‘B/C’ and viability at ‘a’.
According to the rating agency, the current ratings reflect the company’s strong capital position considering the buyout, share repurchases as well as a modest increase in dividends.
Comerica has strong capital tangible common equity and tier I ratios. Moreover, its capital base comprises 100% common equity. This positions the company well to meet the terms of the Basel III requirements. Moreover, the company is exhibiting an improving trend in its credit quality with net charge-offs and non-performing loans declining both sequentially and year over year.
The stable outlook reflects the rating agency’s expectations that the operating performance of Comerica will be somewhat similar to the recent quarters. Yet, its substantial commercially oriented loans portfolio remains vulnerable to economic downturns and therefore asset quality may continue to remain an overhang.
Sterling Acquisition – A Strategic Fit
The Sterling acquisition is a strategic fit for Comerica as it fortifies the company’s existing Texas franchise providing the opportunity to grow in the Houston and San Antonio markets.
It would augment its Houston market share significantly. Comerica’s market share is expected to treble in that area. Besides, it would enable the company to foray into the attractive San Antonio and Kerrville regions and add to Comerica’s banking center network in Dallas-Fort Worth. The acquisition adds 57 branches, including 13 in a new market for Comerica, San Antonio/Kerrville.
Though Sterling countered some credit challenges, it was one of the few independent banks in its market with a good core funding profile. With a solid deposit base and well located branch network, the acquisition is an lucrative one for Comerica.
Per the agreement terms, Sterling shareholders received 0.2365 shares of Comerica common stock in exchange for each share of Sterling common stock they owned. Further, fractional shares were paid in cash. The systems conversion is expected to be completed by the end of this year.
Our Take
We expect this acquisition to enhance Comerica’s growth opportunities with focus on the middle market and small businesses. It leverages additional marketing capacity to offer a wide range of products and services through a larger distribution channel.
Comerica currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, its peers such as Fifth Third Bancorp (FITB) and KeyCorp (KEY) currently have a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.
