Differentiated Growth Not Enough To Push Comerica Ahead Of Peers (NYSE:CMA)

At some point I could understand if Comerica (NYSE:CMA) management wonders what it will take to get any sort of sustained outperformance in the shares. Asset sensitivity was an advantage in 2023 and Comerica lagged other regional banks. Net interest income and net interest margin spread growth and operating leverage are at a premium for 2023, and yet Comerica lags. To be sure, there are reasons for concerns about Comerica’s long-term ability to compete with the likes of Bank of America (BAC), JPMorgan (JPM), Wells Fargo (WFC), U.S. Bancorp (USB), and PNC (PNC), but those seem more than reflected in the share price.

Being in a position where I’m defending Comerica is odd, as this isn’t a bank that I like all that much (or have liked all that much in the past). The rate sensitivity makes it a more cyclical call than I’d prefer, and I likewise have concerns about the disjointed geographic footprint and its ability to drive growth in key markets. Still, it takes about 3% long-term core earnings growth to support a fair value in the $80’s, and that just doesn’t seem all that demanding to me.

Fourth Quarter Results Don’t Exactly Help…

Comerica posted a roughly $0.03/share bottom-line beat in the fourth quarter, but it wasn’t an especially high-quality beat, with a miss at the pre-provision line. Still, in terms of what the market has said it cares about, Comerica is delivering a fair bit of it.

Revenue rose 36% year over year and close to 4% quarter over quarter, beating expectations by about 1% or $0.065/share. Net interest income rose 61% yoy and 5% qoq, beating by about $0.015/share, with net interest margin missing by 17bp (rising 170bp yoy and 24bp to 3.74%), while a 2% contraction in earning assets was a little better than expected.

Fee-based income fell 4% yoy and was flat sequentially, beating by $0.05/share. Most of the upside came from “other” (generally a low-quality source of a beat), with core card fees up 1% qoq and fiduciary income down 5%.

Operating expenses rose more than 11% yoy and 8% qoq, missing by close to $0.09/share. There wasn’t any major driver here (higher occupancy costs didn’t help) and an efficiency ratio of 53% isn’t bad relatively speaking, but this miss doesn’t help when operating leverage is getting more attention.

Pre-provision profits rose more than 81% yoy and fell about 1% qoq, missing by $0.025/share. Provisioning and taxes were better than expected, driving that net $0.03/share of upside, but also meaning that this is a low-quality quarterly beat.

A Healthy Growth Outlook, If They Can Do It

Where many banks ended up talking down growth targets for FY’23, Comerica fared relatively better. By the same token, the bank communicates more often with the Street (mid-quarter updates and so on), so there’s less need for big swings at the numbers.

In any case, guidance came out looking pretty strong. Management is looking for net interest income of 17% to 20% in FY’23, a very strong number on a relative basis, with ongoing net interest margin expansion. Given that analysts have been fretting about banks already seeing their NIM peak (or seeing it in the next quarter or two), I’d have thought this would be a bigger positive, particularly as there were concerns going into the quarter that Comerica’s use of swaps and hedges to control rate risk would cut down the upside to the rate cycle.

As far as other components of guidance go, Comerica is one of the few banks in its size group guiding to meaningful fee-based revenue growth (around 5%). While 7% year-over-year operating expense growth is on the higher side, it should still mean operating leverage in 2023 and pre-provision profit growth in the high-teens to low-20%, as well as low double-digit growth from FY’22-FY’24 at a time when many peers will likely deliver mid-to-high single-digit growth.

I don’t think that Comerica’s guidance is unrealistic. Loan growth of 7% to 8% does seem a little aggressive, but the bank does have the advantage of a sizable middle-market lending operation in Texas (where growth should hold up better). I also look at guidance for 7% to 8% deposit shrinkage as realistic (I’ve seen several banks project growth), and Comerica has levers to pull to offset deposit shrinkage and fund loan growth (including maturing securities).

Looking at some other metrics, Comerica scores high with a 61.5% cumulative loan beta and 59.3% cumulative earning asset beta, though given the bank’s asset sensitivity and commercial lending skew, this isn’t exactly surprising. On the flip side, having business operating accounts among its deposit base is clearly helping; 5.6% qoq non-interest-deposit run-off was better than average, as was the 0.44% deposit cost (up 35bp qoq), the 0.99 interest-bearing deposit cost (up 79bp qoq), and the 11.5% cumulative deposit beta (many peers are in the high teens to low-20%’s).

The Outlook

Again, I find it odd that I’m putting myself in the position of defending Comerica’s outlook and potential. I have issues with this bank, including its high interest-sensitivity (intrinsic to how the business is structured), its disjointed footprint (Michigan, California, and Texas), and its lack of differentiation in the services it offers. Not only is Comerica’s Net Promoter Score (a measure of customer satisfaction) below average, the bank lacks a lot of the higher-end treasury and payment services that banks like Bank of America, JPMorgan, and U.S. Bancorp can offer.

This could become more of an issue as the bank targets new growth markets. Like seemingly everybody else, Comerica is stepping up to enter North Carolina’s middle-market lending market, and is also targeting markets like Colorado and Arizona. I don’t really see what Comerica brings to the table that’s new or differentiated, and I think outstanding long-term growth is a stretch.

By the same token, I’m not modeling exceptional or outstanding long-term growth. Long-term core earnings growth of 3% (from 2022’s ending point) supports a fair value above $80, and an 8.5x multiple on my ’23 EPS estimate (a discount to 9x-10.5x multiples for most peers) likewise gets me to $82.50. The shares likewise appear undervalued on an estimated steady-state 11% ROTCE (using an AOCI-adjusted tangible book value).

The Bottom Line

I’m a big advocate of the notion that stocks don’t go up just because they look cheap. There are reasons to favor other banks over Comerica, but the valuation today is strange – so much so that there is an analyst with a $85 price target who has a “Buy” rating on the shares and another analyst with an $85 price target who has an “Underperform” rating on the shares. I do think there is a potential “catch up” trade here on valuation, but this isn’t a stock I’d really look to own for the long term and that may be a consideration that keeps other investors away as well.