On Dec 22, 2015, we issued an updated research report on KeyCorp. KEY. While improving credit quality and robust balance sheet position continue to be the bank’s key strengths, margin compression and exposure to risky loans remain a concern.
Though revenues in 2014 reflected flattish growth, KeyCorp’s organic growth strategy remains impressive. The rise in revenues witnessed in the first nine months of 2015 is expected to continue as improvement in loans and deposits further accelerate the growth rate. Notably, management expects net interest income to increase in the low single digit range in 2015.
Also, investment banking and debt placement fees for 2015 are expected to improve year over year and be the main driver of the anticipated mid-single digit growth in non-interest income. Further, average loans are expected to grow in the mid-single digit range, driven by strength in commercial businesses.
Moreover, in spite of the increased regulatory and restructuring costs, the company has remarkably managed to trim down expenses, giving it a competitive edge over its peers. Expenses in the fourth quarter are anticipated to be almost in line sequentially (excluding the pension charge). Moreover, the company has been consistently streamlining operations, diversifying products and exiting unfit businesses to propel efficiency and growth.
Shifting the focus on KeyCorp’s capital deployment activities, in May 2015, the quarterly cash dividend was raised by 15.4% to 7.5 cents per share. Also, the company’s sustained initiatives to return capital to shareholders exhibit an efficient share repurchase program in place.
Also, the company’s strategic partnership with Aptexx, a provider of payment and property management software and deal to acquire the Buffalo, NY-based First Niagara Financial Group Inc. in a stock-and-cash deal worth approximately $4.1 billion, which will lead to the creation of the 13th largest U.S.-based commercial bank (in terms of total assets) are bound to accelerate growth in the coming year.
On the flip side, though the bank looks forward to an enhanced revenue generation in the upcoming quarters, the strain on margin triggered by lower asset yields cannot be overlooked. Notably, management expects margin in the fourth quarter to remain relatively stable on a sequential basis.
On the whole, KeyCorp’s improving asset quality, consistent loan and deposits growth and healthy liquidity position represent the potential for future growth. However, ambiguity prevailing over the impact of persistent margin compression, escalating competition, stringent regulatory landscape on the financial performance has led to the 6.5% year-to-date fall in share price.
This can also be observed in the Zacks Consensus Estimate for 2015 and 2016, which remained flat over the last 30 days, at $1.08 per share and $1.14 per share, respectively.
Currently, KeyCorp carries a Zacks Rank #3 (Hold).
Some better-ranked banks include The PNC Financial Services Group, Inc. PNC, BofI Holding, Inc. BOFI and Central Pacific Financial Corp. CPF. All these stocks sport a Zacks Rank #2 (Buy).
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