We have upgraded our recommendation on
) to 'Outperform' from 'Neutral' to reflect the recent announcement
of its cost-cutting initiatives along with sound capital deployment
activities. Moreover, we believe that the company's strong capital
ratios and improving credit quality have contributed to the raise.
Nevertheless, we remain wary of the persisting slow economic
recovery, stringent regulatory restrictions and the low interest
KEYCORP NEW (KEY): Free Stock Analysis Report
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KeyCorp is expected to announce its third-quarter results on
October 18. The Zacks Consensus Estimate for the quarter is 21
cents on revenue expectation of $1.03 billion. The company's second
quarter 2012 earnings were ahead of the Zacks Consensus Estimate.
In July this year, KeyCorp launched an expense saving program,
which aims at rationalizing the cost structure to make it
compatible with the shifting economy and the continual low interest
rate environment. The company intends to reduce its expenses by
$150-$200 million by the end of 2013 and expects the subsequent
quarters to benefit from the initiatives. By the end of this year,
Key Corp expects to save $30-$50 million. Management anticipates
efficiency ratio to remain in the range of 60-65% in the next
several quarters attributable to these initiatives.
Further, in August, KeyCorp announced a couple of strategic
measures to reinforce its consumer and commercial payments
businesses. These include the acquisition of credit card assets
from Elan Financial Services and an amendment of its merchant
services agreement with Elavon, Inc. With the implementation of
these agreements, Keycorp will become a front-runner in debit
payment solutions and processing. Also, the deal is expected to
bolster its operating efficiency and expense management, besides
broadening its revenue base and solidifying its relationship with
Moreover, KeyCorp remains an attractive pick for yield-seeking
investors. During the first quarter of 2012, after receiving the
approval from the Federal Reserve, the company announced a $344
million share repurchase program, which will be executed by March
2013. The company purchased shares worth $85 million in the first
half of 2012. Furthermore, in May, KeyCorp announced an increase in
its quarterly dividend by 66.7% to 5 cents per share. These capital
deployment activities will significantly boost investors'
confidence in the stock.
On the flip side, pressure on net interest margin (NIM) remains a
major 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
the near term due to the soft new loan demand. NIM has remained
under pressure over the last several quarters, but the recent
redemption of trust preferred securities and debt maturities have
eased the pressure to some extent. However, low interest rate
environment and the company's asset-sensitive position are likely
to compress NIM in the future.
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. Consequently, stability of the
balance sheet remains a major challenge for the company at this
point. Similarly, due to the overall weak demand and high
competition, balances in the company's core portfolio continue to
shrink. Until the economic recovery gains momentum, these factors
will continue to adversely impact its financials.
KeyCorp currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. One of its peers,
SunTrust Banks, Inc.
) retains a Zacks #2 Rank (a short-term Buy rating).