Comerica cut to Underperform at BofA on Direct Express transition, NII worries

Bank of America Securities downgraded Comerica (NYSE:CMA) stock to Underperform from Neutral on Monday as analyst Brandon Berman views the lender as facing one of the greatest downside risks to its 2025 net interest income within his mid-cap bank coverage, as the Federal Reserve is in monetary easing mode.

The bond market currently assumes the Fed will cut rates by 200 basis points by the end of 2025, a series of moves that "will likely offset the combined benefit from swaps, reinvestment of low-rate securities, BSBY cessation, and deposit re-pricing," Berman wrote in a note to clients.

On top of the NII worries, the analyst pointed out that the faster-than-expected transition of the U.S. Treasury Department's Direct Express program "adds another layer of risk," and is yet to be reflected in estimates.

Recall in May 2023 when American Banker reported that Dallas, Texas-based Comerica (CMA) breached compliance rules for the Direct Express program. Over a year later, the bank said that it received a preliminary notification that it had not been selected to continue serving as the financial agent to support the program after the contract expires.

The program provided Comerica (CMA) with some $3B in average non-interest-bearing deposits. But management intends to replace these deposits over time, which Berman estimates represents a 6% EPS impact, all else equal.

BofA's Underperform rate diverges from the SA Quant system rating and the average Wall Street analyst rating, both at Hold.

(CMA) slipped 0.7% in Monday morning trading.