Comerica 'Best Positioned' for Rate Rise: Financial Winner

NEW YORK ( TheStreet) -- Comerica ( CMA) was the winner among major U.S. banks on Friday, with shares rising 2% to close at $42.57.

The broad indices ended lower, even though good economic news continued to flow.

The Census Bureau said housing starts during July rose significantly to an annual rate of 896,000 from an upwardly revised 846,000 in June. Building permits increased to an annualized pace of 943,000 in July from an upwardly revised 918,000 in June.

Some homebuilder stocks were strong on the news, with PulteGroup ( PHM) rising over 2% to close at $16.28, while Lennar ( LEN) was up 2% to close at $33.77.

The Department of Labor reported that non-farm business productivity in the U.S. rose by an annualized rate of 0.9% during the second quarter, after slipping by 1.7% the previous quarter. The agency said the productivity recovery during the second quarter reflected annualized "increases of 2.6 percent in output and 1.7 percent in hours worked."

The productivity figures followed Thursday's report from the Labor Department that first-time unemployment claims for the week ended Aug. 10 declined to 320,000 from 335,000 the previous week, and had dropped to their lowest level since late 2007.

Retail stocks continued to hold the market back. Nordstrom ( JWN) was down 5% to close at $56.43, after the retailer late on Thursday lowered its full-year earnings and revenue guidance.

Investors also continue to worry about an expected reduction in bond buying by Federal Reserve, which has been expanding its balance sheet through net monthly purchases of $40 billion in long-term agency mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds since last September.

In the firm's morning note, Deutsche Bank's research team said "Interest rates are going to continue to trend higher because the economy, in particular the labor market, is improving -- at least relative to what was the case when the Fed embarked on QE3 last September."

The market yield on 10-year U.S. Treasury Bonds was up six basis points Friday afternoon to 2.83%. The 10-year yield has risen from 1.70% at the end of April, as investors have anticipated a tapering of Fed bond purchases.

KBW Bank Index ( I:BKX) was up slightly to close at 64.71, with all but six of the 24 index components showing gains.


Shares of Comerica of Dallas have returned 42% this year, following a 20% return during 2012. The shares trade for 1.3 times the company's reported June 30 tangible book value of $33.79, and 14.6 times the consensus 2014 earnings estimate of 2.92, among analysts polled by Thomson Reuters. The Consensus 2015 EPS estimate is $3.35.

Comerica last month reported second-quarter earnings of $143 million, or 76 cents a share, compared to $134 million, or 70 cents a share in the first quarter, and $143 million, or 73 cents a share, during the second quarter of 2012.

Net interest income declined to $414 million during the second quarter from $416 million the previous quarter and $435 million a year earlier. The bank's second-quarter net interest margin was 2.83%, narrowing from 2.88% in the first quarter and 3.10% during the second quarter of 2012.

The company's second-quarter return on average assets was 0.90% and its return on average common equity was 8.23%. Please see TheStreet's earnings coverage for more on Comerica's second-quarter results.

"CMA remains among the best positioned to benefit from rising short-term interest rates," according to JPMorgan Analyst Steven Alexopoulos. In a note to clients on Friday, the analyst wrote, "As we all (perhaps impatiently) wait for the day that short-term rates actually start increasing, the company is likely to do very little between now and then to diminish the potential earnings 'pop' from higher rates."

The Federal Reserve has kept short-term rates in a range of zero to 0.25% since late 2008. The Federal Open Market Committee has repeatedly said this "highly accommodative" policy is likely to remain appropriate at least until the U.S. unemployment rate falls below 6.5%. The U.S. unemployment rate in July improved to 7.4% from 7.6% in June.

So the recent rise in long-term rates won't do it. Comerica has estimated that a straight line nonparallel rise in rates of 200 basis points over a 12-month period would increase its net interest income by $187 million over a 12-month period. The company also provided a hypothetical estimate in its second-quarter 10-Q filing that an instantaneous parallel rise in rates would boost annual net interest income by $823 million.

"Although some investors believe rates are going to be very low for a period that extends beyond 2015, by the time we figure out for certain whether or not the first short-term rate hike was in 2015, we believe the big money would have likely already been made in the stock," Alexopoulos wrote.

The analyst rates Comerica "overweight," with a price target of $47.00.

CMA Chart CMA data by YCharts

Interested in more on Comerica? See TheStreet Ratings' report card for this stock.


-- 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.

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