Comerica's Formidable Growth Play

DALLAS ( TheStreet) -- Regional bank stocks have been in focus now that large universal banks like Bank of America ( BAC) and Citigroup ( CMA) are standing on two feet again.

Against that backdrop, 160-year-old regional bank, Comerica ( CMA), is a stand out in a sea of still-troubled financial institutions.

As the eighteenth largest bank/thrift by asset size, Comerica and its management are formidable players in an industry that was shaken to its core during the worst of the financial crisis and is now going through massive adjustment. Comerica, with $55 billion in assets, which was able to plow through the past three years even while adjusting to a new home state, should not be ignored.
Comerica

Comerica's bread-and-butter product is commercial and industrial (C&I) lending, which means the institution largely avoided headaches seen by peers as a result of consumers defaulting on their loans. As a business-oriented bank, Comerica has been able to successfully navigate through another source of trouble for banks, construction and development loans.

Comerica had fairly high charge offs in its construction portfolio, "which I don't think anybody was able to hide from," says Brett Rabatin, an analyst at Sterne Agee. Its C&I portfolio "illustrates that they are good at managing credit and are a best-in-class type lender."

"They have tremendous upside to a strong economic recovery," Rabatin says. "From a three-to-five year perspective there is a definite strong case to be long on the stock. In the near term, you just have to be an optimist that rates are moving higher sooner rather than later."

Ralph Babb, who has been Comerica's chairman and CEO since 2002, summed up the bank's strategy simply last month during an investor presentation:

"We are positioned for growth. We believe we are in the right markets and have the right products and services to meet the needs of our customers and prospects. We believe we are well positioned for the future," Babb said at the Goldman Sachs financial services conference in December.

"We have the size, scale and market position to be an increasingly important regional player in some very attractive markets," Babb said.

Comerica executives declined to speak to TheStreet regarding this article, with a Comerica spokesman adding the company was in a quiet period leading up to its fourth quarter earnings release on Jan. 19.

The bank can also be respected for its capital proficiency.

Wall Street cheered the bank last March when it raised nearly $1 billion to help it repurchase $2.25 billion worth of preferred stock owned by the government. The company repurchased warrants owned by the U.S. Treasury Department through its Troubled Asset Relief Program (TARP) just a few months later, even as other large regional banks including SunTrust Banks ( STI), Keycorp ( KEY) and M&T Bank ( MTB) still have yet to repay TARP.

Comerica stood out once again in November when it was the first major bank to step out and double its quarterly dividend to 10 cents a share. The bank also has made plans for a share buyback program at the time. Large banks like JPMorgan Chase ( JPM), U.S. Bancorp ( USB) and Wells Fargo ( WFC) keep talking about their interest in raising dividends for shareholders, but so far none have done so.

"What it says is that they're ahead of the game," Sterne Agee's Rabatin says. "They were the first out of the group to repay TARP and I think they're in the driver's seat for what happens to them as oppose to some regional franchise that are trying to figure out if they're going to be a seller or raise capital. They're definitely in the cat bird's seat."

Comerica has no shortage of sell-side analysts covering the stock. Of the 31 analysts who cover the company, nine have the equivalent of buy or strong buy on the stock. The majority of analysts (17) have neutral ratings on the stock, with just three sell ratings.

Matt Burnell of Wells Fargo Securities is one analyst who is bullish on the stock.

Burnell initiated coverage on Comerica last month with an outperform rating. His 12-month target price ranges between $49 and $52 a share, "implying a 20-27% potential upside" from Comerica's share price at the time of the note's publication on Dec. 15.

"We believe that Comerica's growth, capital and asset quality advantages versus peers should allow the company to trade at a premium multiple to its peers in 2011," the note says.

The recent dividend hike and share buyback program, "could result in additional dividend hikes and buybacks in 2011-12 and offer the potential for acquisitions to bolster Comerica's below-peer fee revenue contribution to total revenue," Matt Burnell wrote in the Dec. 15 note.

Comerica is also poised to benefit the most when interest rates rise, analysts say.

"As a result we expect Comerica's EPS growth to prove superior to its peer group in 2011-12," Burnell wrote.

Perhaps Comerica's bold headquarter move in 2007 to Dallas from Detroit was the clearest sign that Babb and members of the board could give to the markets that Comerica is looking to be a buyer - not a seller. While the Midwest and slow-growth markets still make up a large portion f Comerica's business, the move was symbolic of a bank that was serious about focusing on its higher growth markets.

"California, Arizona, Texas and Florida are expected to account for over half of us population growth between 2000 and 2030, which clearly bodes well for our continued growth in these states," Babb said last month. "Our strategy to diversify our geographic footprint is working. Markets outside the Midwest represent well over 50% of our revenue."

Babb also mentioned placing more resources towards its wealth and institutional management business for its customers as a "great growth opportunity" as well as creating tailored deposit product sets given the new regulations, while at the same time de-emphasizing its commercial real estate exposure.

Comerica is not without its challenges. Specifically, maintaining its strong hold on C&I market share in faster growing markets like Texas as other banks move in, particularly as loan growth remains subdued across the industry.

In addition, much of the bank sector's rebound is dependent upon the economy. But Comerica has legs to stand on, given that it is one of the top C&I lenders in the country. C&I loans are typically the first category to see signs growth following a down cycle.

But executives take the competition in stride.

"You don't go into C&I lending over night and part of our strength the fact that we've been doing C&I lending for a very long time, have well-trained individuals that understand the industries they work in, both on the customer side as well as the credit side, which is very important and I think it really paid dividends, as you've seen how we've come through the credit in this recessionary environment," Babb said in December.

"We have a size that allows us to provide a wide array of products and services but maintain a community bank feel. It also affords us the ability to be nimble and provide quick response to customer requests," he said.

-- Written by Laurie Kulikowski in New York.

To contact the writer of this article, click here: Laurie Kulikowski.

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