Comerica Case Study
INTRODUCTION:
The purpose of this paper is to recommend Jack to long the Comerica Incorporated (CMA) stock. In this paper we explain how banks operate and present a small back ground on the issue Comerica is facing. Then we more on to financial statements analysis of CMA, which does not present a very strong outlook of the company, but because of the financial crisis, whole industry is experiencing financial stress. Next, our valuation methods show that CMA is undervalued relative to its peers, and hence is a good company to invest in.
BACKGROUND:
Simply putting, banks accept deposits from public; keep some of those deposits with them and lend the rest to businesses and individuals. Businesses and individuals in turn pay interest on those loans and banks pay interest to depositors, making money from the spread. Nowadays banks operations have become more and more complicated, and hence more important to capital markets. To get in to more detail, banks’ profits come from the following several ways:
Differences between Interest Rates on Loans and Deposits:
As already explained Banks lend loans at the interest rates that are higher than the ones they pay for deposits. A large part of banks’ profits come from the spread between banks’ depositing and lending rates.
Service Fees:
Banks provide financial services to their clients and charge certain amount of fees. By charging fees for managing customers’ bank accounts and providing other financial services such as issuing letter of credits, banks create another source of income, known as noninterest income. Now banks’ services have also expanded into investment consulting and information disseminating. These services usually cost expensive fees.
Financial Products:
Banks provide financial products to help clients manage their property and generate noninterest income. A good example can be that banks sell mutual funds to their clients and gain income from both commissions and certain percentage of the funds’
The purpose of this paper is to recommend Jack to long the Comerica Incorporated (CMA) stock. In this paper we explain how banks operate and present a small back ground on the issue Comerica is facing. Then we more on to financial statements analysis of CMA, which does not present a very strong outlook of the company, but because of the financial crisis, whole industry is experiencing financial stress. Next, our valuation methods show that CMA is undervalued relative to its peers, and hence is a good company to invest in.
BACKGROUND:
Simply putting, banks accept deposits from public; keep some of those deposits with them and lend the rest to businesses and individuals. Businesses and individuals in turn pay interest on those loans and banks pay interest to depositors, making money from the spread. Nowadays banks operations have become more and more complicated, and hence more important to capital markets. To get in to more detail, banks’ profits come from the following several ways:
Differences between Interest Rates on Loans and Deposits:
As already explained Banks lend loans at the interest rates that are higher than the ones they pay for deposits. A large part of banks’ profits come from the spread between banks’ depositing and lending rates.
Service Fees:
Banks provide financial services to their clients and charge certain amount of fees. By charging fees for managing customers’ bank accounts and providing other financial services such as issuing letter of credits, banks create another source of income, known as noninterest income. Now banks’ services have also expanded into investment consulting and information disseminating. These services usually cost expensive fees.
Financial Products:
Banks provide financial products to help clients manage their property and generate noninterest income. A good example can be that banks sell mutual funds to their clients and gain income from both commissions and certain percentage of the funds’