KeyCorp's (KEY) Focus on the Basic Will Benefit Investors - Barron's

January 14, 2013 7:15 AM EST
Despite getting hit pretty hard in the 2008 - 09 financial crisis, KeyCorp (NYSE: KEY) has a simple plan to regain investor confidence: shore up the balance sheet, aim to grow more profitably.

According to Barron's, its a winning combination.

With 1,087 branches spread across the upper U.S., the bank is well-positioned to win. Net income should be flat at $810 million this year with earnings rising seven percent to 92 cents.

One Morningstar analyst couldn't agree more, saying KeyCorp's fair value of $10 per share is about 12 percent above its latest closing price of $8.84 last Friday.

KeyCorp's Tier I common ratio of 11.4 percent, according to data from its most recent quarter. That outpaces peers like M&T Bank (NYSE: MTB) and Huntington Bancshares (Nasdaq: HBAN). The bank's loan portfolio is also solid, with nonperforming borrowings-to-total loans at 1.27 percent, from a peak of 3.68 percent hit in the third-quarter of 2009. Loan growth was also recently at five percent as commercial and industrial borrowing increased. The bank has also paid off its obligation to the U.S after receiving $2.5 billion in TARP funds and taking net loan charge-offs of about $4.2 billion over two years.

Key is also focusing more on the small- and middle-market commercial segment on companies with revs up to $1.5 billion. New clients are also more profitable than existing borrowers, Barron's noted. Corporate net-profit margin is at 27 percent, compared with six percent for community-banking services.

Net-interest margin also outpaces peers at 3.2 percent. That is set to expand with Key having more higher-yielding CDs than issued for liquidity purposes during the financial crisis and those CDs are reaching maturity. Key should be able to replace those with lower-cost deposits.

Versus rivals, Key is still a little less reliant on net-interest margins with 45 percent of revs coming from fees, versus 26 percent for peers.

Shares are flat in early trading Monday.

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