Sell Comerica, Buy Fifth Third: Stifel

NEW YORK ( TheStreet) -- Stifel Nicolaus analyst Christopher Mutascio on Friday downgraded Comerica to a "Sell" rating, citing "the lack of earnings catalysts and the high P/E multiples".

Comerica's shares closed at $33.10 Thursday, returning 30% year-to-date, following a 38% decline during 2011.

The shares trade just above their reported June 30 tangible book value of $32.76, and for 12 times the consensus 2013 EPS estimate of $2.70, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.68. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 1.81%.

While the shares are cheaply priced to book value, considering that the Dallas lender improved its second-quarter operating return on average assets to 0.93%, from 0.84% the previous quarter, and 0.70% a year earlier, according to Thomson Reuters Bank Insight, Mutascio said the price-to-earnings multiple is high even to his "normalized" earnings estimate of three dollars a share.

"The downgrade is not an indictment on management," Mutascio said, adding that "in fact, we believe management has done an admirable job in navigating the company through the financial crisis and the ensuing challenging operating environment."

Comerica reported second-quarter net income attributable to common shares of $142 million, or 73 cents a share, improving from $129 million, or 66 cents a share, in the first quarter, and $95 million, or 53 cents a share, during the second quarter of 2011. The second-quarter bottom line was boosted by a $37 million release of loan loss reserves. Comerica had released $22 million in reserves the previous quarter, and $43 million a year earlier.

Comerica had $62.7 billion in total assets as of June 30. A major second-quarter highlight for the company was a 5% increase in average non-real estate (C&I) commercial loans, to $25.9 billion, while average total loans grew 2%, to $43.2 billion. This was Comerica's eighth straight quarter of commercial loan growth.

Despite the strong lending results, Comerica's net interest margin -- the spread between the average yield on loans and investments, and the average cost for deposits and borrowings -- declined to 3.10%, from 3.19% in the first quarter and 3.14% in the second quarter of 2011. Margins have been declining for most regional banks in the prolonged low-rate environment, and Thursday's announcement by the Federal Reserve Open Market Committee that the central bank would be attempting to bring long-term rates even lower, through the purchase of $85 billion in long-term mortgage-backed securities through the end of the year, will further pressure industry rate spreads.

Given the margin pressure and with "the contribution from loan loss reserve releases waning, no direct mortgage exposure, and C&I loan growth showing signs of slowing, we simply do not see any earnings growth catalysts on the horizon."

The analyst estimates that Comerica will earn $2.61 a share this year, followed by EPS of $2.60 in 2013.

Mutascio called Comerica's price-to-earnings multiple of 12.7, based on his 2013 EPS estimate, "the highest within our large cap bank coverage and significantly higher than the median of 10.0x," and said the 11-time multiple to his normalized earnings estimate for the company was "second highest within the group and higher than the median of 9.3x... despite the fact our estimated ROA and return on equity for the company (both on 2013 and on a normalized basis) are well below the medians of our large cap bank coverage."

The analyst added that since Fifth Third Bancorp ( FITB) has "lower P/E multiples on both our 2013 and normalized EPS estimates, higher profitability measures (both ROA and ROE) and slightly higher dividend yield (3Q12 dividend increase is also likely at FITB, which would widen the gap further), we would rotate out of CMA and into FITB."

Comerica's ROA has ranged between 0.67% and 0.93% over the past five quarters, while its ROE has ranged between 5.91% and 8.23%. Fifth Third's ROA has ranged between 1.12% and 1.48%, while its ROE has ranged between 9.79% and 12.82%.

Fifth Third's shares closed at $15.61 Thursday, returning 24% year-to-date, following an 11% decline last year. The shares trade for 1.3 times their reported June 30 tangible book value of $11.89, and for 10 times the consensus 2013 EPS estimate of $1.58. Based on a quarterly payout of eight cents, Fifth Third's shares have a dividend yield of 2.05%.

Mutascio rates Fifth Third a "Buy," with a $17 price target, and estimates the Cincinnati lender will earn $1.62 a share in 2013.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.