On Mar 22, 2013, we reaffirmed our Neutral recommendation on
) based on its in-line results, meaningful capital deployment
actions and expense reduction initiatives. However, pressure on
net interest margin (NIM), persisting slow economic recovery and
a stringent regulatory landscape remain the major causes of
concern for this Zacks Rank #3 (Hold) stock.
Why the Neutral Stance?
KeyCorp's fourth-quarter 2012 earnings were in line with the
Zacks Consensus Estimate and the year-ago earnings. Top-line
growth, continued improvement in credit quality and robust
capital ratios were the positives for the quarter. However,
higher operating expenses offset the positives.
Further, in the past 30 days, only a few estimates have moved up,
keeping the Zacks Consensus Estimate for 2013 unchanged.
Similarly, estimates for 2014 have remained flat over the same
period. In addition, over the past 4 quarters, the company has
delivered average earnings surprise of 10.8%.
Recently, after receiving the Federal Reserve's approval, KeyCorp
announced a $426 million share repurchase program, which will be
executed by Mar 2014. The company also plans to hike its
quarterly dividend by 10% from the present $0.05 per share
starting the second quarter. This makes KeyCorp a sound asset for
yield-seeking investors. In addition to controlling the rising
expenses, management at KeyCorp chalked out an expense reduction
program with an aim to rationalize the cost structure. The
company intends to reduce expenses by $150 - $200 million by the
end of this year. It also plans to reduce occupancy costs and
consolidate nearly 5% of its branch network.
Yet, pressure on NIM remains a primary concern for KeyCorp.
Though the company has been benefiting from improved funding
costs and better earning asset yield since the second half of
2009, we expect the margin pressure to remain in place in the
near term due to the soft new loan demand. In addition, 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, thereby lowering its ability to sell
assets at acceptable prices.
Going forward, a slow economic recovery and stringent regulatory
landscape are likely to add to its woes.
Other Stocks to Consider
Stocks that are performing better than KeyCorp include
State Street Corporation
). All these stocks carry a Zacks Rank #2 (Buy).
BANKUNITED INC (BKU): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
KEYCORP NEW (KEY): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis
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