Essay about Comerica Case Study

2229 Words May 16th, 2014 9 Pages
INTRODUCTION:
The purpose of this paper is to recommend Jack to long the Comerica Incorporated (CMA) stock. In this paper we explain how banks operate and present a small back ground on the issue Comerica is facing. Then we more on to financial statements analysis of CMA, which does not present a very strong outlook of the company, but because of the financial crisis, whole industry is experiencing financial stress. Next, our valuation methods show that CMA is undervalued relative to its peers, and hence is a good company to invest in.
BACKGROUND:
Simply putting, banks accept deposits from public; keep some of those deposits with them and lend the rest to businesses and individuals. Businesses and individuals in turn pay interest on
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In the June 2008 quarter, company paid $99 Million as dividends against the net income of $56 Million during the same quarter. These levels of dividends are not sustainable in the current recessionary environment, and when the company does cut dividends, it will send a bad signal to the market. Downward Revision in the Federal Funds Rate:
We noticed that spread, which equals to net interest expense as a % of earning assets minus net interest expense as a percentage of interest bearing liabilities, is decreasing. One of the reason of this phenomenon is that interest bearing deposits are increasing – which is bad for the company. Moreover, there has been a downward revision of 3.25 percent in the federal funds' rate from its original level of 5.25% in July 2007, to 2.0% in 2008 – limiting the banks’ ability to charge higher spreads. Moreover, commercial loans are predominantly floating rate, so decrease in the Federal Funds rate will affect company’s interest income. We do think that decrease in the Fed’s rate will increase the demand for loans but given the credit crunch, it seems unreasonable in the short run.
Decrease in Interest Income Percentage Measures:
The shrinkage of interest income can be obviously seen from the Corporation's net interest income as a percentage of earning assets, from 6.82% in 2007 to 4.86% by the end June 2008. This decrease is due to both factors of the ratio, one interest income is decreasing,

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