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 marginal rise in
non-interest income, reduction in operating expenses and steady
capital ratios in the third quarter of 2012. However, we
remain concerned about the concentration risk emanating from the
company's dependence on fee income and the worrying macro
Commerce Bancshares has maintained a steady dividend policy,
delivering incremental dividends for the past 44 successive
years. In November 2012, the company declared a special cash
dividend and a stock dividend, apart from the regular quarterly
cash dividend. In February 2012, the company had increased its
regular quarterly dividend by 5% to 23 cents per share and has
maintained it since then. During the quarter, Commerce Bancshares
also repurchased about 98,000 shares at an average price of
$39.66 per share. As a result, Commerce Bancshares remains an
attractive stock for the yield-seeking investors.
Further, Commerce Bancshares has sustained its capital levels
considerably above its peers. Despite increasing credit costs,
the company has been registering stable capital ratios. As of
September 30, 2012, the company remained well capitalized with
its capital ratios - tier 1 risk-based capital of 14.92%, total
risk-based capital of 16.25% and leverage of 10.00% - well above
the regulatory requirements. We expect this to act as a shield
against any possible loss in its credit portfolio in the
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 55.89% 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 steady 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
Shares of Commerce Bancshares currently retain a Zacks #3 Rank,
which translates into a short-term Hold rating. However, another
institution in the same sector; namely,
ViewPoint Financial Group, Inc.
) retains a Zacks #1 Rank (translating into short-term Strong Buy
COMMERCE BANCSH (CBSH): Free Stock Analysis
VIEWPOINT FINL (VPFG): Free Stock Analysis
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