Company Reports

For its first quarter, no-moat-rated KeyCorp reported net income to common shareholders of $183 million, or $0.20 per diluted share, on $1.5 billion of net revenue. An incremental $29 million FDIC special assessment charge related to the agency increasing its estimated loss from the March 2023 banking events reduced earnings per share by 10%. We do not anticipate a material change to our $19 fair value estimate and continue to view the shares as undervalued.

KeyCorp is a midsize U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

No-moat-rated KeyCorp’s adjusted fourth-quarter earnings were not too far off the FactSet consensus of $0.23 per share and our estimate of $0.19 per share. Reported earnings per share were adjusted to $0.25 per share primarily due to the impact of some notable items: an FDIC special assessment charge of $190 million for uninsured deposits of certain failed banks during the banking turmoil in March 2023, efficiency-related expenses of $67 million, and a pension settlement charge of $18 million. Fourth-quarter revenue was in line with consensus and our estimates. We do not plan to materially change our $20 fair value estimate for KeyCorp and believe that the market is punishing Key for its fourth-quarter results without fully considering 2024 guidance.

KeyCorp is a midsize U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

No-moat-rated KeyCorp reported results that largely met our expectations. Earnings per share of $0.29 came in ahead of FactSet consensus of $0.27 and our own estimate of $0.24, largely driven by lower-than-expected provisioning and a bounceback in capital markets-related fees. Net interest income and expenses were largely as expected. The bank maintained its full-year outlook, and we expect it to meet this guidance, although we see expenses trending toward the high end of "stable," up roughly 1% for 2023. However, the bank’s goal of keeping expenses stable in 2024 is roughly what we already had in our forecasts, so we did not see any true surprises or negative developments here.

KeyCorp is a midsize U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

No-moat-rated KeyCorp reported weak second-quarter results. EPS of $0.27 missed FactSet consensus of $0.32 as well as our estimate of $0.41. The miss was primarily attributed to lower net interest income, which was $978 million compared with our estimate of $1,045 million, and lower fee income, which was $609 million compared with our estimate of $673 million.

KeyCorp is a midsize U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too 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.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

KeyCorp is a midsize U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

KeyCorp is a mid-sized U.S. regional bank. The firm has the largest relative exposure to investment banking-related fees among the regional banks under our coverage, is investing in a unique digitally focused retail business (Laurel Road), and has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets.

No-moat-rated KeyCorp reported fourth-quarter earnings per share of $0.38, missing the FactSet consensus of $0.55 as well as our own estimate of $0.60. Top-line results weren’t far off from expectations, as total revenue came in at $1.9 billion, in line with the consensus estimate of $1.93 billion. The main driver of the miss was higher provisioning, which increased to $265 million in the quarter from $109 million last quarter. We wouldn’t read too much into this, as the timing of provisioning is difficult to predict and in this case is simply related to changing economic forecasts and trying to predict stress that hasn’t occurred yet. Net charge-offs, delinquencies, and nonperforming loans were all steady during the quarter.

KeyCorp was hurt during the financial crisis largely because of its ventures into higher-risk commercial real estate lending in out-of-footprint states. Since the crisis, KeyCorp has wound down most of its construction-related commercial real estate business and refocused on its core corporate banking operations and capital markets services. With increasing credit quality and declining credit-related costs, along with significant operational improvements, KeyCorp has returned to healthy profitability. The bank's First Niagara acquisition back in 2016 has also helped improve the bank's operating efficiency and scale.

No-moat-rated KeyCorp reported third-quarter earnings of $0.55 per share, missing the FactSet consensus estimate of $0.58 slightly. Revenue came in at $1.89 billion, in line with the consensus at $1.88 billion. Given Key’s higher exposure to investment banking-related revenue, cyclical lulls for the industry are always a risk, and the bank has yet to see a recovery with these fees still trending at $150 million in the quarter compared with more than $200 million in 2021.