We continue to maintain our long-term “Neutral” recommendation on Commerce Bancshares Inc. (CBSH). Although the company has the scope to expand inorganically with its excellent liquidity position, we remain cautious on the company’s loan volumes and non-performing asset position, which need to be improved in order to gain a foothold in the industry. Nevertheless, the company’s direct retail and commercial-banking franchise are expected to post steady earnings going forward.
Despite rising credit costs, Commerce Bancshares has maintained its capital levels significantly above its competitors. The company continues to experience a growth trend in its tangible equity ratio, which improved to 10.24% as of March 31, 2011 from 9.99% as of March 31, 2010. We expect this to act as a buffer against any probable losses in its credit portfolio in the upcoming quarters.
Commerce Bancshares also continues to boost shareholders’ value through its consistent dividend policy and share repurchase program. The company has continued to deliver incremental dividends for the past 42 years. In the first quarter of 2011, cash dividend per share inched up 2.7% from the prior-year level. Further, the company repurchased 101,625 shares of the treasury stock at an average price of $42.43 through its previously approved treasury stock buyback plan.
On the flip side, the recently imposed Federal check on overdraft and credit card transaction fees would significantly affect the company’s profitability over near to mid term. These regulations are expected to reduce Commerce Bancshares’ annualized pre-tax revenue by $15 million to $16 million in 2011. Besides, they are also likely to increase costs and limit the ability of the company to pursue business opportunities.
Additionally, Commerce Bancshares’ success is largely influenced by the general economic conditions of the specific markets in which it operates. The company is not as geographically diversified as larger national or other regional banks. The company provides financial services primarily in the states of Missouri, Kansas, central Illinois, Oklahoma and Colorado. With less exposure in other parts of the country, the company faces substantial risk of diseconomies of scale, considering the current interest rate volatility.
Commerce Bancshares currently retains a Zacks # 2 Rank, which translates into a short-term ‘Buy’ rating. However, TCF Financial Corporation (TCB), one of the company’s closest peers, retains a Zacks # 3 Rank (short-term ‘Hold’ rating).
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