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Is Comerica a Safe Haven from Credit Woes?
March 7, 2007

Is Comerica a Safe Haven from Credit Woes?

When Comerica Inc. (NYSE:CMA) announced that it was moving its corporate HQ from Detroit to Dallas, we had to smile. CMA is one of the more solid mid-western banking organizations, but has recently suffered from a marketplace which is dying along with the auto industry. Moving to TX amounts to CMA following many of its individual and corporate customers, who are migrating out of the Rust Belt in search of jobs and new opportunities.

With a growing number of observers realizing that the question of credit quality goes beyond the subprime sector, CMA may present a safe haven for investors who like financials. At the end of 2006, CMA's two banking units had $57 billion in tangible assets and delivered an ROE of 16% and an ROA of 1.53%, in both cases 0.5 standard deviations above the regional bank peer group using data from the FDIC and calculations by the IRA Bank Monitor.

At the end of December 2006, CMA's lending yield was an impressive 678bps, above peer but comfortably out of the dreaded subprime zone. With a ratio of net interest income to non-interest income of 2.21:1, CMA presents a classic banking profile with relatively low duration risk due to an aggregate portfolio WAM of just 2.7 years vs. almost 4 years for the regional bank peer group.

CMA has a deposit to asset ratio of 78% and many other conservative attributes, but one negative metric which caught our eye was the bank's default experience, which peaked at 120bp at the end of 2002 vs. just 83bp for the peer group. From then through year-end 2005, the bank reported above peer defaults even as the regional bank peer group trended lower at just 45bp in gross charge offs.

CMA's Loss Given Default was well-above peer, peaking in the nose-bleed levels of 90% LGD in the 2002-2003 period vs. the 80% range for the peers. Starting in 2005, CMA saw its LGD experience fall into the 60% range. The million dollar question is whether this represents a permanent change in the bank's post-default recovery performance or a trough in the regional bank peer group LGD performance.

Trading on a 10x trailing P/E and just 1.83 times book value, CMA seems to reflect an acquisition premium and may be close to the bottom of its near-term trading range. This view depends crucially, however, on whether and how fast the wheels fall off off the proverbial cart with respect to credit conditions in the US mortgage market and the economy generally. With 49% of its loan book in C&I; and 40% in real estate, CMA reflects general US credit risk and will track the fortunes of the mid-western markets which it serves today -- regardless of its intentions to head to TX.

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