We are maintaining our 'Neutral' recommendation on
Commerce Bancshares, Inc.
) as we believe that the risk-reward profile of the company is
currently balanced. Our decision is based on the company's
better-than-expected second quarter 2012 results that include
increased top line and declining operating expenses. However, we
remain concerned about the concentration risk emanating from the
company's dependence on fee income and the unsettling macro
Commerce Bancshares reported second quarter 2012 earnings of 80
cents per share, substantially ahead of the Zacks Consensus
Estimate. Results benefited from higher net interest income and
lower operating expenses, partially offset by a decrease in fee
income. Moreover, credit quality and capital ratios continued to
Commerce Bancshares has maintained a steady dividend policy,
delivering incremental dividends for the past 44 successive years.
In February 2012, the company increased its quarterly dividend by
5% to 23 cents per share and has maintained it since. During the
quarter, Commerce Bancshares also repurchased 1,033,000 shares at
an average cost of $38.76 per share. As a result, Commerce
Bancshares remains an attractive stock for the yield-seeking
Further, Commerce Bancshares has sustained its capital levels
appreciably above its peers. Despite escalating credit costs, the
company has been registering stable capital ratios. The company
remained well capitalized with its capital ratios - tier 1 risk
based capital of 14.80%, total risk based capital of 16.13% and
leverage of 9.73% - well above the regulatory requirements. We
expect this to act as a shield against any possible loss in its
credit portfolio in the forthcoming quarters.
In addition, Commerce Bancshares' balance sheet continues to remain
strong with a robust capital and deposit base. The favorably
diversified balance sheet and medium interest rate risk comfortably
position the company for growth. Moreover, the loan losses of the
company have been subsiding for the last several quarters. With the
gradual recovery of the housing sector, these losses may further
decline in the near future. Furthermore, lower loan to deposit
ratio of 55.26% will facilitate the funding of loan growth at
moderate costs in the future.
We believe that such efforts will help the company gain substantial
market share and enhance its profitability in the long run. Yet,
Commerce Bancshares' heavy dependence on net interest income is
anticipated to thwart its growth prospects. With average demand for
loans registering a constant decline, there will be an adverse
impact on its top line.
Commerce Bancshares' operations are mainly concentrated in a
handful of states namely Missouri, Kansas, Illinois, Oklahoma and
Colorado. The lack of geographical diversity may cause diseconomies
of scale stemming from the current interest rate volatility.
Moreover, regional economy does influence a company's performance.
Therefore, having operations in various regions is helpful in
nullifying associated risks.
In addition, the rigorous regulatory requirements will mar the
revenue projections from overdraft and credit card transactions.
According to the latest proposed rules by the Federal Reserve, the
banks are required to maintain 7% total tier 1 ratio, way above the
current requirement of 2%. This would considerably affect the
lending as well as the investment capacities of banks including
Commerce Bancshares. Furthermore, such limitations may raise costs
and limit its ability to pursue business opportunities.
Shares of Commerce Bancshares currently retain a Zacks #3 Rank,
which translates into a short-term Hold rating. One of its peers,
Huntington Bancshares Incorporated
) retains a Zacks #2 Rank, which translates into short-term Buy
COMMERCE BANCSH (CBSH): Free Stock Analysis
HUNTINGTON BANC (HBAN): Free Stock Analysis
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