On Jun 13, 2013, we reiterated our long-term recommendation on KeyCorp. (KEY) at Neutral. Our decision rests on its continuous capital deployment activities, strong balance sheet and solid first-quarter 2013 earnings. However, we remain concerned about the persistent slow economic recovery and a stringent regulatory landscape.
Why the Neutral Stance?
KeyCorp’s first-quarter adjusted earnings came in at 22 cents per share. This was marginally ahead of the Zacks Consensus Estimate and the year-ago earnings of 20 cents. Results were driven by a rise in net interest income and almost stable operating expenses, partially offset by a fall in fee income. Moreover, continued improvement in asset quality and strong capital ratios were the other highlights for the quarter.
Following the earnings release, the Zacks Consensus Estimate went down by 1.1% to 86 cents per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate remained stable at 97 cents over the same time frame. The company currently has a Zacks Rank #3 (Hold).
On May 16, 2013, KeyCorp announced a dividend hike of 10% to 5.5 cents per share, following the approval of its capital plan by the Federal Reserve. Alongside, the company announced a $426 million share repurchase program to be executed by Mar 2014.
Moreover, management at KeyCorp chalked out an expense reduction program with an aim to rationalize the cost structure. The company intends to reduce its expenses by $150–$200 million by the end of 2013.
Further, KeyCorp maintains a sound capital position along with an improving credit quality. All these factors are expected to fuel the company’s growth going forward.
On the flip side, pressure on NIM remains a primary concern for KeyCorp. Also, market dislocations over the last couple of years have led to deterioration in the valuation of many of the asset categories in KeyCorp’s balance sheet.
Additionally, the sluggish economic recovery and stringent regulatory landscape could negatively impact the company and its financials going forward.
Other Banks to Consider
Some better performing banks include Enterprise Financial Services Corp. (EFSC), Old Second Bancorp Inc. (OSBC) and Tower Financial Corporation (TOFC). All these carry a Zacks Rank #1 (Strong Buy).
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