Commerce Bank -- Moody's affirms the ratings of Commerce Bank (long-term deposits at Aa2); outlook remains stable

Moody's

December 22, 2020 at 5:29 PM·14 min read

Rating Action: Moody's affirms the ratings of Commerce Bank (long-term deposits at Aa2); outlook remains stable

Global Credit Research - 22 Dec 2020

New York, December 22, 2020 -- Moody's Investors Service ("Moody's") has affirmed the ratings and assessments of Commerce Bank ("Commerce"), which has a standalone Baseline Credit Assessment (BCA) of a1, long- and short-term deposit ratings of Aa2/Prime-1, and a long-term issuer rating of A2. Its counterparty risk ratings (local and foreign currency) are A1/Prime-1. Commerce Bank is the primary operating subsidiary of unrated Commerce Bancshares, Inc., headquartered in Missouri. Commerce's rating outlook remains stable.

The ratings affirmation reflects Moody's unchanged assessment of the bank's standalone credit profile against the backdrop of challenging operating conditions following the coronavirus pandemic outbreak, including historically low interest rates.

Affirmations:

..Issuer: Commerce Bank

....Adjusted Baseline Credit Assessment, Affirmed a1

....Baseline Credit Assessment, Affirmed a1

....LT Counterparty Risk Assessment, Affirmed Aa3(cr)

....ST Counterparty Risk Assessment, Affirmed P-1(cr)

....LT Counterparty Risk Rating (Local Currency), Affirmed A1

....ST Counterparty Risk Rating (Local Currency), Affirmed P-1

....LT Counterparty Risk Rating (Foreign Currency), Affirmed A1

....ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1

....LT Issuer Rating, Affirmed A2, Stable

....LT Bank Deposits, Affirmed Aa2, Stable

....ST Bank Deposits, Affirmed P-1

Outlook Actions: ..Issuer: Commerce Bank ....Outlook, Remains Stable RATINGS RATIONALE

The ratings affirmation considers Commerce's strong performance throughout the economic cycle and healthy credit fundamentals, which support its above peer average ratings. In particular, Commerce's credit quality is sound, its profitability rebounded quickly following elevated loan loss provisions earlier in 2020, and its management team operates a diversified franchise with a balance sheet that has a bias towards high capital and liquidity levels. Moody's expects these characteristics will endure even if the coronavirus pandemic results in further economic weakness.

The consistency of Commerce's performance reflects its disciplined underwriting practices, an emphasis on long-term relationships and a diversified loan book with limited concentration risk. For example, Commerce's exposure to commercial real estate, segments of which are particularly challenged given the economic effects of the coronavirus pandemic, is more modest than most other rated regional banks. In addition, Commerce's earnings profile benefits from a diverse revenue stream, with a little less than 40% of total revenue coming from noninterest income, and from an efficient operating platform.

Nonetheless, in a lower-for-longer interest rate environment, Commerce's ability to grow net interest income will be limited, especially as loans it extended under the Paycheck Protection Program (PPP) roll off its balance sheet as anticipated in 2021. At 30 September 2020, PPP loans accounted for 9% of total loans. Moreover, given its already low deposit costs and minimal use of market funds, Commerce has little room to further reduce its funding costs. For the third quarter of 2020, Commerce's total cost of interest-bearing liabilities was just 17 basis points. As such, although Moody's expects Commerce's profitability to remain strong, the firm's net income/tangible assets ratio may not soon return to the levels it reached in 2018/2019 of between 1.6% and 1.7% given lower market interest rates and a more uncertain economy.

Favorably for creditors, Commerce's capitalization is strong, as reflected in its above-average Moody's adjusted tangible common equity/risk-weighted assets ratio of 13.2% at 30 September 2020, protecting the bank against unexpected losses. Moreover, because Commerce's return on equity is also above-average, its management team may be comparatively less aggressive in returning capital to shareholders in an improving economic environment.

Commerce's stable outlook reflects Moody's view that there will be little change in the bank's strong credit metrics over the next twelve to eighteen months.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action incorporates the breadth and severity of the shock, and the deterioration in credit quality and capital it is going to trigger.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on Commerce's a1 BCA is not likely because Commerce is already among Moody's highest-rated banks, both in the US and globally. However, if Commerce's profitability and capitalization were to strengthen significantly from current levels, positive pressure could emerge. A higher BCA would likely lead to a ratings upgrade.

Downward pressure on Commerce's BCA would follow a material reduction in its capital position, significant weakness in credit quality or enduring weakness in its profitability. A lower BCA would likely lead to a ratings downgrade.

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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Allen Tischler Senior Vice President Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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