Conservative Capital Management And Regional Expansion Will Shape Future Success

Key Takeaways

• Comerica's strong credit discipline and capital management provide a competitive edge for shareholder returns and earnings resilience in economic downturns.
  
• Strategic regional and sector expansions aim to enhance deposit growth and revenue, especially in interest-bearing segments and renewables.
  
• Economic uncertainties, inflation, and low loan demand may challenge Comerica's revenue growth, with potential credit risks impacting earnings and net margins.

Catalysts

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

• Comerica's focus on conservative capital management, with a CET1 ratio well above strategic targets, provides flexibility for strategic initiatives and potential shareholder returns. This is likely to positively impact earnings through optimized capital allocation.
  
• The bank's historically strong credit performance and underwriting discipline position it well to differentiate competitively, particularly if macroeconomic conditions deteriorate. This could lead to improved net margins by minimizing credit losses.
  
• Expected benefits from the BSBY cessation, maturing securities, and swaps are projected to drive a 5% to 7% increase in net interest income for 2025, contributing to revenue growth by optimizing the bank's interest rate strategy.
  
• Investments in deposit gathering, product enhancements, and strategic talent acquisitions are aimed at bolstering deposit growth, particularly in interest-bearing segments, which can support a more efficient funding mix and revenue growth.
  
• Expansion in the Southeast and Mountain West regions is expected to drive loan and deposit growth, particularly in growing sectors like environmental services and renewables, supporting long-term revenue growth and regional diversification.

Comerica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Comerica's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 20.5% in 3 years time.
• Analysts expect earnings to reach $731.4 million (and earnings per share of $5.88) by about April 2028, up from $705.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $807 million in earnings, and the most bearish expecting $656 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Comerica Future Earnings Per Share Growth

Risks

• The report highlighted that loan demand was muted and driven by declines in the national dealer services and commercial real estate sectors, which might continue to negatively impact revenue and earnings.
  
• Concerns were mentioned regarding the current economic uncertainty and inflationary pressures that could affect customers' profitability, potentially leading to higher credit risks and impacting net margins.
  
• With the expectation of flat or declining deposits and minimal loan growth in the near term, Comerica's net interest income growth could be challenged, directly affecting earnings.
  
• The economic outlook includes uncertainties with possible supply chain disruptions and macroeconomic trends, which could strain revenue collection and credit performance.
  
• Noninterest income faced pressures, with declines due to rate and commodity price movements, which might continue or worsen, affecting overall revenue growth.

Valuation

• The analysts have a consensus price target of $60.3 for Comerica based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $731.4 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $51.44, the analyst price target of $60.3 is 14.7% higher.
  
• 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.