Fitch Affirms Comerica's L-T IDR at 'A' Following Large Regional Bank Review; Outlook Stable
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), UnionBanCal Corporation (UBC), 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
IDRS, VRs AND SENIOR DEBT
Fitch has affirmed CMA's ratings supported by the company's above-peer tangible capital base, sound asset quality measures and consistent performance. Capitalization levels are considered a rating strength as well as consistent credit performance through various economic cycles. Further, Fitch considers CMA's capital management to be conservative given that the company has historically managed with higher capital levels than its peers. CMA's 10-year average TCE/TA ratio is 8.99% versus the peer group average of 6.84%.
CMA's Rating Outlook remains Stable. Although CMA has a relatively larger exposure to energy (8% of total loans) versus its peers, Fitch believes the company's long history in energy lending, proven track record through various economic downturns and oil price dips, should translate into a manageable level problem loans which are expected to be in-line with long-term nonperforming and net charge-off (NCO) averages for its energy-related lending. CMA's NCOs for its energy loan book peaked at 69bps in 2009.
Fitch anticipates CMA may experience some negative credit migration due to its energy exposure. CMA's provisions would likely continue to rise as a result of increased classified and/or criticized loans. Its credit measures are at historical lows, and some reversion to normalized ranges should be expected.
Similar to the industry, during the credit crisis CMA faced credit quality challenges, but performance remained relatively stable, reflecting the predominately commercial composition of the loan book. CMA's C&I loans are roughly 57% of total loans, which is the highest share by a wide margin relative to large regional peers (on average C&I accounted for 28% of peers' total loans). The credit downturn was tied more to real estate assets.
Fitch expects that CMA will continue to operate with a higher level of capital versus its peers. As of June 30, 2015, CMA's capital position is one of the highest of the peer group. Fitch believes CMA's capital level is prudent given the relatively higher risk earning-asset base. Prior to the credit downturn and historically, CMA's tangible common equity measures have been much higher than other regional banks'.
CMA's earnings continue to lag regional peers given the prolonged low rate environment and slow recovery in the economy. Although CMA's earnings performance is consistent and reflects a slight improved year-over-year, its earnings profile remains in the lower end compared to most peers.
In Fitch's opinion, given the prolonged rate environment, CMA's future results will likely remain in-line with current performance, reflecting CMA's asset sensitive balance sheet. However, when rates do rise CMA's earnings should benefit more than other peers thereby boosting its current ROA and NIM.
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. The IDRs and VRs do not incorporate any potential support.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
CMA's subordinated debt is one notch below its VR of 'A-'. The company's trust preferred securities are four notches below the VR reflecting two notches down for loss severity and two notches down for non-performance. CMA's preferred securities are rated five notches below its VR with two notches for loss severity and three for non-performance.
CMA's subordinated debt and other hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR.
HOLDING COMPANY
CMA's IDR and VR are equalized with those of its operating companies and banks, 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. The ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.
SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of CMA's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Comerica Bank are equalized across the group.
LONG- AND SHORT-TERM DEPOSIT RATINGS
CMA's uninsured deposit ratings are rated one notch higher than the company's 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.
RATING SENSITIVITIES
IDR, VR, AND SENIOR DEBT
CMA's ratings are at the high end of its rating potential given that financial performance is marginally in-line with similarly rated financial institutions.
In Fitch's view, CMA's ratings are likely more sensitive to a sustained decline in oil prices given its relatively larger than peer energy exposures. The ratings and Outlook are Stable for now, but negative rating momentum could occur should credit trends in the energy loan books, such as nonperforming loans and NCOs, approach levels above long-term averages for energy-related lending. Incorporated in Fitch's expectations is the view that provisions and classified and/or criticized inflows will likely increase
Although not anticipated, the ratings could be negatively affected if CMA were to reduce capital 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. Additionally, a change to a more aggressive business strategy would also be viewed negatively.
Should capital levels be managed well below current levels without a corresponding increase in core earnings, negative ratings action may ensue.
SUPPORT RATING AND SUPPORT RATING FLOOR
CMA's Support Rating and Support Rating Floor are sensitive to the bank's capacity to procure extraordinary support in case of need.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by CMA's and its subsidiaries are primarily sensitive to any change in CMA's VR.
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 Fitch could notch the holding company IDR and VR from the ratings of the operating companies. However, this is unlikely for CMA given the strength of the holding company's liquidity profile.
SUBSIDIARY AND AFFILIATED COMPANY
As the IDRs and VRs of the subsidiaries are equalized with those of CMA to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in CMA's IDRs.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of the long- and short-term deposits issued by CMA and its subsidiaries are primarily sensitive to any change in CMA's long- and short-term IDRs.
Fitch has affirmed the following ratings:
Comerica Incorporated
--Long-term IDR at 'A'; Outlook Stable;
--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 Stable;
--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'.
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