We are maintaining our Neutral recommendation on
Commerce Bancshares, Inc.
) as we believe that the risk-reward profile for the company is
currently balanced. Our decision is based on the company's
better-than-expected first quarter 2012 results that include
increased top line and declining operating expenses. However, we
remain concerned about the concentration risk emanating from
dependence on fee income and the dodging macro economic issues.
Commerce Bancshares reported first quarter 2012 earnings of 75
cents per share, substantially ahead of the Zacks Consensus
Estimate. The improvement in results was driven by higher fee
income, lower operating expenses, sturdy capital position and
enhanced asset quality. However, declining net interest income and
dwindling loan demands were the dampeners.
Commerce Bancshares remains an attractive pick for the
yield-seeking investors due to its extensive capital deployment
activities. The company has been maintaining a sound dividend
policy for the past 44 years. In February 2012, the dividend was
hiked by 5% to 23 cents and since then the company has maintained
this level. Moreover, under its share repurchase program, Commerce
Bancshares has purchased approximately.
Commerce Bancshares has significantly elevated its capital
ratios compared with peers. The company remains comfortably placed
with - tier 1 risk based capital of 14.85%, total risk based
capital of 16.19% and leverage ratio of 9.70% - well above the
regulatory requirements. This is expected to withstand any
Further, strong equity, nominal debt, common and preferred stock
availability and noteworthy debt ratings ensure robust liquidity
levels at Commerce Bancshares. Though the company lacks long-term
debt, it is well-placed to raise additional debt via jumbo
certificates of deposit, privately placed corporate notes or other
types of debt through its Capital Markets Group or other public
debt markets in the subsequent quarters.
We believe that such efforts will help the company to 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
adversely 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.
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
First Merchants Corp
) retains a Zacks #1 Rank, which translates into short-term Strong
COMMERCE BANCSH (CBSH): Free Stock Analysis
FIRST MERCHANTS (FRME): Free Stock Analysis
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