Comerica Incorporated: The Valuation Dilemma Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

The paper attempts to highlight the importance of banks to the capital market and for the society at large followed by how it operates and what are the core activities of a bank. The paper matures with the financial analysis of Comerica Incorporated (CMA) and whether the investment in the shares of CMA is feasible for Jack Wilson’s company, Darden Capital Management (DCM). The share price of CMA is $33.36 as of September 2008; the prices of the share have drastically fallen in the last 12 months. Finally, the paper considers CMA’s operating model feasibility during the financial crisis of 2007 and 2008 and the impact of the crisis on the price.

Banks and their operations

Banks are financial intermediaries, they consolidate the deposits and use them to transform into loans. Through this process, the banks have access to people who have surplus cash reserves who deposit or invest it in the banks, which ensures the safety of the fund and also earns the interest on the deposited amount. The bank lends these funds to the borrowers who are in need of cash to fulfill their current needs or their business’s needs. The bank charges interest on the borrowed funds and pays interest out of the interest received by the depositors. The primary source of income of the banks is by charging higher interest rates from the borrower and giving lower rates to the depositors.

Besides this primary source of income, the banks also use the funds in other activities like investment banking, private banking, corporate banking, consumer finance, insurance, commodity trading, foreign exchange trading, trading in equities, options, futures and money market.

Importance of banks for capital markets

There is a high importance of banks in the capital markets, strong institutions like banks are essential for markets to perform well, and well-functioning capital markets are necessary for banks to be satisfactorily well-capitalized to expand credit obtaining ability to borrowers without increasing the risks of the banks beyond prudent levels. There have been times in history where the capital markets had crashed, and the banks supported investors as a result of which the capital market was able to recover.

Importance of banks for society at large

Banks generate value for their customers, suppliers, employees, shareholders and other investors. Banks assist their customers in investments, financing, making secure payments and asset management. They truly make the lives easier for their customers, as the banks help people grow by helping them fulfill their dream. Life without banks would be unimaginable, and the society that currently exists and is growing is largely due to the banks.

Key characteristic of CMA

Book value per share

The book value per share is the value of a share according to the accounting record of the company; it is calculated by dividing the total equity by the number of shares outstanding. The book values grew in 2007, and March 2008 and in June 2008 they were reduced by $1.16, reflecting a loss of $1.16 per share.

Tangible book value per share

The tangible book value per share is calculated by dividing the tangible assets by the total number of shares, and this shows the value tangible item available for one share. This excludes the intangible items that cannot be liquidated. The results of CMA for this are in line with the trends of book value per share, and the loss per share for three months according to this is also $1.16 per share.

Diluted EPS

The diluted EPS is the earning per share over a period, and the earning per share of the company has been declining in 2007, followed by a further decline in the quarterly EPS in March and June 2008. This is a bad signal in the market and this justifies the fall in the share prices of the company.

DPS

The Dividend per share is the amount of dividend issued to one share, the dividend per share in 2006 was $2.36 for the entire year and a quarter was $0.59. The quarterly dividend for 2007 was $0.62. The company had increased the dividend payment in the two quarters of 2008, although the EPS has declined.

Non-interest income

The income generated from sources other than interest has grown in the last quarter on 2008, however, this is bad for the bank as it is diversifying from the core activity or the income from the interest have decreased.

Credit loss provision

The credit loss provision is an estimate which the banks perceive that it will lose. The fall in the economic environment has led to the increase in the credit provision, in 2007 it was estimated to be17.4% of the profit after tax and in the two-quarter of 2008 it had significantly risen. Hence, it is a strong signal that the economy of the country is going down........................

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In early September 2008, at the height of the mortgage crisis, the manager of student Darden Capital Management fund, wants to assess whether Comerica Incorporated, a regional bank based in Dallas, Texas, is a good candidate for inclusion in the portfolio. He must perform an assessment of the bank say whether the bank seems to be undervalued by the market, or further reduce the cost may be possible. It must take into account all the factors affecting the assessment of the Bank, as related to the bank itself, as well as current market conditions. The case can be taught to: a) review evaluation of the bank in turbulent times, and b) understand the key financial statements (balance sheet and income statement) for banks and how they may differ from those for an industrial company, and c) understand the key value drivers of bank value (metric for profitability, credit quality, liquidity and capital). "Hide
by Giorgos Allayannis, Baijnath Ramraika Source: Darden School of Business 16 pages. Publication Date: March 10, 2009. Prod. #: UV1410-PDF-ENG