Comerica Crumbles Under Goldman Sachs Downgrade
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Comerica (CMA) - Get Report shares tumbled 3.6% to $70.41 Tuesday after Goldman Sachs downgraded the financial institution to sell from neutral.
Analyst Ryan Nash revised his target price of Comerica shares to $70 from $86. In a note to investors, Nash said while the Dallas, Texas-based Comerica "is undertaking a number of measures -- improving loan growth, controlling costs and returning capital, the downside risk from Fed cuts will likely prove too challenging to fully offset."
"Given CMA's rate-sensitive balance sheet," Nash wrote, "it is exposed to downside risks from lower rates as its disclosures say that NII (net interest income) will decline by 12% from a 200bp decrease in rates (100bp average) vs. peers' disclosures at a lower 5%. However, at this point in the cycle, banks would normally hedge their downside risks by adding swaps or floors. While CMA has added $2.8 billion of swaps, we estimate it would need to add an additional $20 billion-$24 billion to be adequately hedged."
Ryan said when he speaks with investors, he has historically heard about three levers for Comerica: Expenses, capital and M&A.
"Comerica has done a very good job controlling costs and returning capital over the past few years as core expenses are down MSD (mid-single-digits) since 2015 (including an accounting change)," Ryan said, "while it's taken its (CET1) Common Equity Tier 1 from about 12% to about 10% by YE 2019. However, we see less levers from here as several expense tailwinds in 2019 that allowed CMA to keep costs flat are unlikely to repeat (FDIC costs, GEAR up savings), while most of its excess capital has been used."