UBS Cuts Price Target on KeyCorp (KEY) Ahead of FNFG Deal
UBS maintained a Neutral rating on KeyCorp (NYSE: KEY), and cut the price target to $13.50 (from $16.00), ahead of FNFG deal. While the deal should allow KEY to improve its efficiency ratio, this benefit is blunted if it only leads to limited earnings accretion. Analyst David Eads thinks the 2018 target of 5% accretion could be conservative, and expect some level of revenue synergies are likely. However, the upside looks relatively modest compared to the attractive organic growth opportunity KEY laid out during 3Q earnings.
Eads commented, "The deal should bring down KEY's CET1 ratio by ~100 bps to 9.5%, providing a boost to the ROTE profile but at the cost of 12% dilution to TBV that could take over 10 years to earn back without revenue synergies. We see the fact that this deal was viewed as an attractive opportunity for deploying excess capital as reflecting the difficult environment for the banking sector. It also suggests that other banks could have difficulty getting approval to bring down capital ratios meaningfully through buybacks, a negative read-through for capital returns at ZION, RF, and CFG in particular."
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Shares of KeyCorp closed at $12.42 yesterday.