“Comerica Stock Drops 1% Following BofA’s Downgrade to Underperform”
Source: Davit Kirakosyan
Comerica Shares Downgraded by BofA Securities
Shares of Comerica (NYSE:CMA), an American financial services company, fell by over 1% following a downgrade by BofA Securities analysts. The financial analysts shifted their rating from Neutral to Underperform and adjusted their previously set price target from $55 to $52. Notably, this downgrade is reflective of their belief that Comerica’s stock is currently overpriced, trading above its historical range, and does not adequately account for potential downward risks.
One of the primary reasons behind this downgrade is the forecast of potential interest rate cuts. This comes at a time when the Federal Reserve and other global central banks are contemplating lowering interest rates to stimulate economic growth amid the Covid-19 pandemic. Lower interest rates can squeeze banks’ net interest margins, which is a key measure of profitability for banks. Hence, the impending interest rate cuts pose a significant threat to Comerica’s future earnings.
Potential Impact of Anticipated Rate Reductions
The BofA securities analysts noted that anticipated rate reductions of as much as 200 basis points could offset any gains from a variety of factors. These include the profits from swaps, the reinvestment of low-yield securities, the transition away from BSBY (Broad Synthetic Secured Overnight Financing Rate), and adjustments in deposit pricing.
The swaps market is a crucial component of the financial system, where financial instruments are traded to manage risk. The potential rate reductions could affect the profitability of these swaps. Similarly, reinvestment of low-yield securities, which are typically considered safe investments, could also be impacted by the rate cuts.
Moving away from the BSBY, a benchmark interest rate, can have implications for a bank’s lending and deposit operations. Changes in deposit pricing, the interest rate paid on bank deposits, can also significantly impact a bank’s net interest income, the difference between the revenue generated by a bank’s assets and the expenses associated with paying its liabilities.
Comerica Faces Significant Risks
Among mid-cap banks, BofA Securities analysts believe that Comerica faces one of the most substantial risks to its 2025 net interest income (NII) projections. NII is a critical factor in a bank’s financial health, representing the difference between interest income generated and the amount of interest paid out to lenders. A lower NII can squeeze a bank’s profit margins, impacting its overall profitability.
The analysts also highlighted potential issues arising from the faster transition of the Direct Express program, which is a federal government program that provides a card-based platform to deliver federal benefits. These issues haven’t been fully accounted for in current estimates, which could further put pressure on Comerica’s earnings.
Conclusion
In conclusion, the future profitability of Comerica seems to be under substantial threat, according to BofA Securities analysts. The bank’s shares are trading at an overpriced level, and potential downward risks, such as the expected interest rate cuts, are not being adequately reflected in the current pricing. As a result, investors should exercise caution when considering this stock for their investment portfolio.
Going forward, it will be interesting to see how Comerica responds to these potential challenges and what strategies it will employ to mitigate the impact of these downward pressures on its profitability.