Compass Point Cuts Price Target on KeyCorp (KEY) Following Announced First Niagara (FNFG) Acquisition

Compass Point maintained a Buy rating on KeyCorp (NYSE: KEY), and cut the price target to $16.00 (from $17.50), following the company's announced acquisition of First Niagara (NASDAQ: FNFG). KEY shares came under pressure following the release of the deal terms, with investors in particular honing in on the large hit to TBV disclosed by management and relatively long payback period of 10+ years.

Analyst Jesus Bueno commented, "We reiterate our Buy rating and lower our target price to $16 from $17.50 as we adjust our valuation methodology in light of the announced acquisition of First Niagara (FNFG - Buy, $13 PT, Hunsicker). KEY shares came under pressure following the release of the deal terms, with investors in particular honing in on the large hit to TBV disclosed by management (~12% TBV dilution) and relatively long payback period of 10+ years. We believe that shares were oversold following the announcement, especially considering the conservative assumptions employed by KEY for the transaction. In fact, our estimates for EPS accretion (2017E) and ROTCE improvement appear to be well ahead of management's assumptions. Although the initial reaction to the acquisition was viewed negatively, we expect that investors will begin to give KEY more credit for opportunistically deploying capital and expanding its nearly $100B in assets by more than 40%. We also anticipate that KEY shares will re-rate as a result of their more efficient proforma capital structure and higher ROTCE, which should command a higher P/TBV multiple. At the same time, KEY will resume its return of capital through buybacks in 2H16 which should further help to support EPS, while the bank is also pursuing noninterest revenue initiatives, some of which are scalable and could be applied to the newly acquired FNFG. We maintain our $1.10/share FY15E EPS, and lower our FY16E EPS to $1.20 from $1.26 due to a higher share count from the anticipated 3Q16 stock issuance and the suspension of KEY's buyback. We increase our FY17E EPS estimate to $1.52 from $1.45 as we estimate the FNFG acquisition will result in 5% EPS accretion in 2017."

For an analyst ratings summary and ratings history on KeyCorp click here. For more ratings news on KeyCorp click here.

Shares of KeyCorp closed at $12.78 yesterday.

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