Comerica: Risk-Reward Balance

| About: Comerica Inc. (CMA)

We have reiterated our Neutral recommendation on Comerica Inc. (NYSE:CMA). The reaffirmation follows a detailed analysis of the company’s fundamentals following first quarter 2011 earnings, along with an evaluation of the current economic environment, its strengths, opportunities, weaknesses and acquisition efforts.

Comerica’s first quarter net income of 57 cents per share outpaced the Zacks Consensus Estimate of 48 cents and improved from the prior-quarter figure of 53 cents. The quarter’s earnings saw a striking year-over-year improvement from a loss of 46 cents.

The year-over-year improvement reflected an increase in non-interest income and net interest margin, partially offset by higher non-interest expenses and a lower net interest income. Furthermore, a significant improvement in credit quality also acted as a positive catalyst.

Concurrent with the fourth quarter 2010 earnings release, Comerica announced that it would acquire Sterling Bancshares Inc. (NASDAQ:SBIB) in a stock-for-stock transaction. The strategic acquisition will augment Comerica's growth in Texas from the current 95 banking centers to 152.

The takeover will also give Comerica 65 banking centers in Houston, 63 in Dallas/Fort Worth, 13 in San Antonio and 11 in Austin. Additionally, the acquisition will add about $3.0 billion in loans and $4.0 billion in deposits.

According to management, Comerica continues to be on track to close its pending acquisition of Sterling Bancshares in the second quarter, subject to customary closing conditions. Management expects to complete the systems conversion in the fourth quarter, and anticipates a smooth and seamless transition.

Going forward, we expect Comerica to enjoy business expansion not only from acquisitions but also from an overall improvement in the economy. Moreover, its business model positions it well to benefit from an eventual rise in interest rates in the second half of 2011.

Comerica also boosted investors’ confidence by doubling dividend and authorizing a share repurchase in the fourth quarter of 2010. Management expects to continue the share repurchase program, which coupled with dividend payments would result in a payout of up to 50% of earnings for full-year 2011.

Yet Comerica’s significant exposure to the riskier areas, such as commercial real estate markets, lack of meaningful loan growth and regulatory headwinds are the downsides. We remain concerned about the company’s growth prospects. Loan growth has clearly moderated over the past year, and growth in fee income remains restricted.

Moreover, we expect the recent regulatory moves and a sluggish economic recovery to restrain fee income. These are also reflected in the guidance for full-year 2011, which includes management’s assumption of a single-digit decline in non-interest income from 2010. Market-related fees are also expected to be lower as customers remain cautious in a sluggish and still uncertain economic environment.

Hence, the positive and negative seem balanced for the stock and the Neutral recommendation is retained. Additionally, shares of Comerica currently retain the Zacks #3 Rank, which translates into a short-term Hold rating.