Declining Loan Demand And Deposits Will Pressure Bank Profitability

Key Takeaways

• Projected loan and deposit declines in 2025 suggest potential challenges to revenue growth amid decreased demand and pressure on net margins.
  
• Modest noninterest income and net interest income growth indicate potential earnings pressure and revenue volatility given the economic environment.
  
• Strong capital position and resilient credit portfolio support earnings stability and growth, bolstered by structural tailwinds and positive momentum in noninterest income.

Catalysts

Provides financial services in the United States, Canada, and Mexico.

• Comerica projects a decline of 1% to 2% in full year 2025 average loans despite maintaining strong pipelines and activity levels, which suggests that revenue growth may be below consensus expectations due to reduced loan demand.
  
• The expectation of full year 2025 average deposits declining by 2% to 3% can be a forward-looking reflection on potential revenue pressure from challenges in deposit growth, indicating that net margins may not grow as expected.
  
• Increases in noninterest income are forecasted to be modest at approximately 2% for 2025. Slow growth in this area could pressure earnings as it suggests limited upside in revenue from non-loan related business activities.
  
• Comerica anticipates its full year 2025 net interest income to rise by only 5% to 7%, while highlighting the potential for increased rates to adversely affect its net interest margins, reflecting possible revenue volatility and pricing power issues.
  
• Despite a historical track record of excellent credit management, the persistent inflation and elevated rates that pressure customer profitability raise concerns that net charge-offs could impact future earnings, even at the lower end of the normal range for charge-offs.

Comerica Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Comerica compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Comerica's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 21.8% today to 18.8% in 3 years time.
• The bearish analysts expect earnings to reach $656.0 million (and earnings per share of $5.25) by about May 2028, down from $705.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 10.2x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

Comerica Future Earnings Per Share Growth

Risks

• Comerica's net interest income could improve due to the structural tailwinds associated with its swap and securities portfolios, contributing positively to earnings as interest rates shift.
  
• The bank's strong capital position, with a CET1 ratio well above the strategic target, provides flexibility for repurchases and dividends, which could support stable earnings growth.
  
• Noninterest income grew, and the bank expects positive momentum in customer-related fees, which could enhance revenue despite some noncustomer-related pressures.
  
• The credit portfolio remains resilient with low net charge-offs, providing stability to net margins even amid uncertainties, and contributing to earnings.
  
• Tailwinds from potential reductions in deposit pricing and the targeted growth of interest-bearing deposit sources could further enhance Comerica's profitability metrics.

Valuation

• The assumed bearish price target for Comerica is $50.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Comerica's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $656.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $54.69, the bearish analyst price target of $50.0 is 9.4% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.