We are maintaining our long-term “Neutral” recommendation on KeyCorp (KEY) based on its improving credit quality, stable capital position and various on-going initiatives to enhance its market share. However, the volatile operating environment along with increased costs related to the Basel III and new financial regulations are expected to have a negative impact on the company’s financials.
We view KeyCorp as an asset for yield-oriented investors. The company increased its quarterly dividend in May 2011 and has maintained it since then. We believe that the company will further boost its shareholders’ value this year, based on its stable capital position, by clearing the next round of stress test.
Over the last few years, KeyCorp has been enhancing its market share with the main focus on increasing its branch network in profitable markets. Earlier this month, the company announced its plan to purchase 37 retail banking branches in New York from First Niagara Financial Group (FNFG).
KeyCorp continues to aim for inorganic growth opportunities. We believe that with heightened regulatory restrictions, it would be difficult for small banks and financial institutions to run profitably. This will provide KeyCorp with an opportunity to acquire small firms and further enhance its market share.
On the flip side, various changes on the regulatory front are expected to have a negative impact on KeyCorp’s financials. Management expects the Durbin Amendment and Regulation E to bring down the revenue in the upcoming quarters. Further, KeyCorp will be less flexible with respect to business investments, given the regulatory requirement of additional surcharge for large U.S. banks with assets of $50 billion or more under Basel III.
Another factor which is a cause of concern for KeyCorp is the pressure on net interest margin. Though the company has been benefiting from improved funding costs and better earning asset yields, we expect the margin pressure to remain due to the weak loan demand and low interest rates environment.
KeyCorp currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
FIRST NIAGARA (FNFG): Free Stock Analysis Report
KEYCORP NEW (KEY): Free Stock Analysis Report
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