Fitch Affirms Comerica's L-T IDR at 'A'; Outlook Negative
The Rating Outlook has been revised to Negative from Stable. In Fitch's view, CMA's financial performance will be pressured more than expected through 2016 and 2017 due its comparatively higher direct exposure to energy lending given the prospects for depressed oil prices over the next two years.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch's affirmation of CMA's ratings is supported by the company's solid, tangible capital base, strong funding profile, proven credit performance through various credit cycles and consistent performance. That said, Fitch has previously cited that CMA's ratings would be sensitive to a prolonged period of low oil prices given that it has a relatively larger energy exposure when compared to large regional peers. At that time, Fitch's oil price assumption was \\$45, and is now currently \\$35, before recovering in 2017.
The revision to Negative reflects higher than expected asset quality deterioration and we expect CMA's financial performance will face greater pressure than other large regional peers given its relatively higher exposure to energy lending. CMA's funded energy loans as a percent of tangible common equity (TCE) is roughly 45% at year-end 2015, compared to the 20% average for the large regional peer group. CMA's energy and indirect energy loans totaled 7.5% of total loans (or \\$3.7 billion in total outstandings) at year-end 2015. Fitch also notes that credit deterioration in the energy book is trending higher than historical experience relative to previous energy cycles, which was a key rating sensitivity highlighted in Fitch's rating affirmation in October 2015. CMA disclosed that net charge-off (NCO) averages for its energy book peaked at 69bps in 2009. For the fourth quarter of 2015 (4Q15), based on the company's public information, annualized NCOs in the energy book were roughly 1.00%. Nonperforming loans in the C&I book stood at 0.95% compared to 0.39% in 4Q14.
CMA's earnings profile has been weaker and lagged similarly rated peers for some time due mainly to the prolonged low rate environment. The company's sizeable amount of commercial loans (55% of total loans) that are tied to variable rates make it highly asset sensitive to short-term interest rates. This is underscored by the fact that CMA has disclosed an improvement to net interest income of \\$90 million (absent any material increase in deposit costs) for the full-year 2016 due to the December 2015 rate increase.
Going forward, Fitch estimates profitability will trend down during 2016, as credit costs are expected to rise. CMA's return on assets (ROA) has averaged 0.80% over the last five years versus the large regional peer average of 1.08%. Furthermore, CMA's pre-provision net revenue (PPNR)/Average Assets was 1.27% for 2015 compared to 1.44% for 'A' rated banks and 1.71% for the large regional peer group.
More recently, the company announced that provisions are expected to increase in the range of \\$75 million - \\$125 million, which will further pressure already challenged profitability. CMA has announced it expects to take the provision charge in 1Q16.
Today's affirmation is also supported by CMA's solid capital position given its risk profile, which in Fitch's opinion has served to offset the company's relatively weaker earnings profile. CMA uses a simple capital structure together with a high level of common equity. Although Comerica's capital ratios have historically been above peer averages, this trend has reversed in recent quarters. For 2015, CMA's CET1 ratio at YE 2015 was 10.54%, which slightly lags the large regional peer group average by about 30bps. In general, CET1 ratios have been trending down for the large regional peer group. Given expectations for credit and modest earnings for CMA, Fitch believes capital levels may trend down closer to peer averages also pressuring the rating.
Fitch's revision to a Negative Outlook reflects our view that the potential loss content in CMA's reserve-based energy exposures should be manageable given the senior secured nature of the loans. Historically, oil field services loss content is generally higher than E&P lending. CMA's exposure to oil field services lending is 15% of total energy loans, which is lower than some of its large regional peers. However, uncertainties remain as to the ability of E&P borrowers to navigate through the recent oil price decline, particularly as hedging protection starts to roll-off and accessibility to capital markets tightens. Moreover, any further and sustained declines in oil prices will likely lead to more deficiencies in E&P borrowing bases. This could create further challenges for these E&P borrowers which ultimately lead to higher loss content than initial estimates.
SUPPORT RATING AND SUPPORT RATING FLOOR
CMA has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CMA is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any potential support.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
CMA's subordinated debt is one notch below its VR of 'A-'. The company has no trust preferred securities or preferred securities outstanding. CMA's subordinated debt rating is in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR.
HOLDING COMPANY
CMA's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. The ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.
SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of CMA's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Comerica Bank are equalized across the group. Fitch does not rate any other subsidiaries of CMA.
LONG- AND SHORT-TERM DEPOSIT RATINGS
CMA's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt, because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
CMA's ratings are at the high end of its rating potential and therefore further upside is unlikely.
Fitch considers CMA's ratings to be sensitive to its ability to control losses in its energy book and improve its long-run profitability. In assessing this, Fitch will focus on the impact, if any, of higher credit costs on profitability, trends in credit performance, and its capital position, including CET1 ratio, relative to its large regional peer group. The revision to a Negative Outlook also reflects our view that over the Outlook horizon, typically between 12-18 months, CMA's credit performance will likely deteriorate more than its peers given the company's relatively larger exposure to energy. Although Fitch believes the company has a long history in energy lending and a proven track record through various economic downturns, the significant decline in oil prices and slow recovery may lead to a sharper rise in NPAs and NCOs than initially expected.
Should credit costs increase significantly and rise above normalized ranges and continue to pressure earnings measures, ratings could be downgraded by one notch. CMA's 10-year-average NCO ratio is 62bps. We note that solid asset quality and capital were considered offsets to the company's modest earnings profile.
Although not anticipated, the ratings could be negatively affected if CMA's CET1 capital position were to fall below peer averages without a corresponding increase in core earnings. Further, a payout ratio (including repurchase activity) exceeding 100% would also put pressure on current ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR
CMA's Support Rating and Support Rating Floor are sensitive to the bank's capacity to procure extraordinary support in case of need.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt issued by CMA and its subsidiaries are primarily sensitive to any change in CMA's VR.
HOLDING COMPANY
Should CMA's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR from the ratings of the operating companies. However, this is considered unlikely for CMA given the strength of the holding company's liquidity profile.
SUBSIDIARY AND AFFILIATED COMPANIES
As the IDRs and VRs of the subsidiaries are equalized with those of CMA to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in CMA's IDRs.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of the long- and short-term deposits issued by CMA and its subsidiaries are primarily sensitive to any change in CMA's long- and short-term IDRs.
Fitch has affirmed the following ratings and revised Outlooks as indicated:
Comerica Incorporated
--Long-term Issuer Default Rating at 'A'; Outlook to Negative from Stable;
--Senior shelf at 'A';
--Senior debt at 'A';
--Subordinated debt at 'A-';
--Viability Rating at 'a';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Support at '5';
--Support floor at 'NF'.
Comerica Bank
--Long-term IDR at 'A'; Outlook to Negative from Stable;
--Subordinated debt at 'A-';
--Senior debt at 'A';
--Long-term Deposits at 'A+';
--Viability Rating at 'a';
--Short-term IDR at 'F1';
--Short-term Deposits at 'F1';
--Support at '5';
--Support floor at 'NF'.
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