KeyCorp Earnings: While Earnings Are Under Pressure, We Think Market Is Overly Harsh

No-moat-rated KeyCorp reported first-quarter results that show earnings pressure is building, but we view the pressure as manageable. We had already expected fourth-quarter results would be the peak for profitability in the current rate cycle, and while the drop-off from that peak has accelerated a bit, it is nothing categorically different. We think the market did a reasonable job of sorting KeyCorp on a relative basis into the higher-risk names, as the bank is indeed facing more earnings pressure than most peers we cover. However, on an absolute basis, we have a hard time getting to today’s market price, even after reviewing the damage of a post-March banking environment. As we update our projections once again and make sure we are being prudent with our through-the-cycle net interest margin estimate (assuming rates eventually fall from current levels), we do not expect a material change to our $21 fair value estimate. We believe the shares remain materially undervalued.