BofA Merrill Lynch Upgrades Commerce Bancshares to Neutral, Raies PO to $46.00

In a report published Thursday, Bank of America Merrill Lynch analyst Erika Najarian upgraded Commerce Bancshares, Inc.

, raising its price objective to $40.00. According to the report, the analyst's cautious view on CBSH was largely driven by concern surrounding continued pressure on earnings from a declining net interest margin. However, spread revenues are expected to stabilize and begin to grow as we move into 2014 driven by the combination of a stabilizing net interest margin and steady loan growth. “Our 2014 and 2015 EPS estimates of $2.85 and $3.15 respectively remain unchanged,” the report noted. “Our 2014 EPS estimate implies no YoY earnings growth vs. 6% in median YoY growth that we forecast for our mid andsmall-cap banks. Despite the 35% rally in the stock last year, at 15.7x our ‘14e EPS shares trade at a discount to the 17.5x median for our smid-cap peers. While we consider CBSH as a high quality franchise that should continue to drive steady shareholder returns, we believe this valuation discount relative to peers is likely to persist in the absence of an acceleration in EPS growth. Additionally, headline risk from a final ruling on what banks can charge merchants on debit card transactions could serve as an overhang on the stock, given that debit interchange fees contribute approx. $36mn or 10% of ‘14e EPS.” The report further asserted that although management has stayed relatively conservative with regards to capital deployment coming out or the 2008-2009 credit crisis, it is believed that CBSH's strong capital position with a TCE/TA ratio of 9.2 percent vs. 8.3 percent median of smid-cap peers, combined with a solid balance sheet should While management has stayed relatively conservative with regards to capital deployment coming out of the '08-'09 credit crisis (only announced a single small bank acquisition last year), we believe that Commerce's strong capital position, with a TCE/TA ratio of 9.2% vs. 8.3% median of smid-cap peers, coupled with a solid balance sheet should allow management to capitalize on potential M&A opportunities - both on the banking and fee income side. CBSH closed Wednesday at $45.60 with shares trading up at 1.99 percent.