Comerica Hurt by Rising Expenses, To Gain From High Rates

Steadily rising non-interest expenses will likely continue to hurt Comerica Incorporated's CMA bottom-line growth. Also, a lack of loan portfolio diversification may hurt amid an uncertain economy and competitive markets. Nonetheless, rising loan balances are expected to aid growth in the near term. With ample liquidity, debt repayments seem manageable and capital deployment activities may be sustainable.

The escalating cost base is concerning for Comerica. The company's non-interest expenses saw a compound annual growth rate (CAGR) of 2.6% over the last five years (2018-2022), with the increasing trend continuing first-quarter 2023 mostly due to rising pension expenses.

Management expects a rise of 7% in expenses in 2023 primarily due to the higher pension expenses. Such rising costs may hinder bottom-line growth in the upcoming quarters.

Comerica has substantial exposure to commercial and commercial mortgage loans. As of first-quarter 2023, the company's exposure to such loans was 83.3% of the total loans. Such a lack of diversification can be risky for the company amid an uncertain economy and competitive markets.

Though Comerica is trying to diversify its geographical footprint, it has notable business exposure in California and Michigan, where the economic environment has been increasingly challenging over the past few years. Going forward, any economic or political doldrums in these markets will likely affect the company's performance.

Furthermore, the company's high leverage than the industry, makes it an unsafe bet. The company's debt/equity ratio stands at 1.26 compared with the industry average of 1.07. This reflects that it has a higher debt burden relative to its peers and will unlikely be able to fare well in a dynamic business environment. 

Additionally, analysts seem to be bearish on the company's prospects. Over the past month, the Zacks Consensus estimate for earnings has been revised 1.9% and 2.1% lower for 2023 and 2024, respectively. CMA currently carries a Zacks Rank #4 (Sell).

Shares of CMA have lost 40.6% so far this year compared with the industry's decline of 9.9%. 

Nonetheless, higher interest rates and improving loan commitments will drive net interest income in the upcoming period. Moreover, its improving performance and decent liquidity reflect that such capital deployment activities are sustainable in the future.

Banks Worth a Look

A couple of better-ranked stocks from the banking space are Mitsubishi UFJ Financial Group, Inc. MUFG and Pathward Financial Inc. CASH, each currently carrying a Zacks Rank #2 (Buy).

Earnings estimates for MUFG have been revised 1.3% upward for fiscal 2023 over the past 60 days. The company's shares have gained 23.5% over the past six months.

The consensus estimate for CASH's fiscal 2023 earnings has been revised 1.8% upward over the past 30 days. Over the past six months, the company's share price has increased 5.9%.