We continue to maintain our long-term “Neutral” recommendation on Commerce Bancshares Inc. (CBSH). Although the company has the scope to expand inorganically with its excellent liquidity position, we remain cautious on the company’s loan volumes and non-performing asset positions, which need to be improved in order to gain a foothold in the industry. Nevertheless, the rating upgrade by Moody’s would act as a positive catalyst.
In December 2010, Moody’s Investors Service, the rating arm of Moody’s Corp. (MCO), upgraded its outlook for Commerce Bancshares and its subsidiaries to Stable from Negative. The company’s stable performance, solid capital and liquidity despite challenging economic conditions in the country led to outlook upgrade.
According to the rating agency, Commerce Bancshares’ modest exposure to construction and land loans has also helped the company perform better than its peers. The company’s direct retail and commercial-banking franchise are also expected to post steady and predictable earnings.
Despite rising credit costs, Commerce Bancshares has maintained its capital levels significantly above its competitors. The company has been experiencing a growth trend in its tangible equity ratio, which improved to 10.27% as of December 31, 2010 from 9.71% in 2009. We expect this to act as a buffer against any probable losses in its credit portfolio in the upcoming quarters.
Commerce Bancshares continues to maintain a consistent dividend policy, delivering incremental dividends for the past 42 consecutive years. In 2010, cash dividend per share inched up 2.8% from the prior-year level. In December 2010, the company paid its seventeenth consecutive annual stock dividend.
On the flip side, the recently implemented regulations will lower fees from overdraft and credit card transactions in the near to mid term. Commerce Bancshares expects the effect of these regulations to reduce annualized pre-tax revenue by $15 to $16 million in 2011. Furthermore, such regulations may increase costs and limit the ability of Commerce Bancshares to pursue business opportunities.
Additionally, Commerce Bancshares’s success is largely influenced by the general economic conditions of the specific markets in which it operates. The company is not as geographically diversified as larger national or other regional banks. The company provides financial services primarily in the states of Missouri, Kansas, central Illinois, Oklahoma and Colorado. With less exposure in other parts of the country, the company faces substantial risk of diseconomies of scale, considering current interest rate volatility.
Commerce Bancshares currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, TCF Financial Corporation (TCB), one of the company’s closest peers, retains a Zacks #3 Rank (short-term ‘Hold’ rating).
COMMERCE BANCSH (CBSH): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
TCF FINL CORP (TCB): Free Stock Analysis Report
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