KeyCorp (NYSE: KEY)
Last Price: US$ 20.28 | Fair Value: US$ 26.00
Business Strategy & Outlook:
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 drastically improve the bank’s operating efficiency and scale. KeyCorp has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets. While this provides some protection from a localized downturn, it has also made hitting ideal branch and deposit concentrations more difficult. The First Niagara acquisition has improved many of these metrics for KeyCorp in New York (First Niagara was headquartered out of Buffalo), such as deposits per branch and average metropolitan statistical area market share. KeyCorp also gained access to some key new product sets, most notably residential mortgages, which remains a key growth driver for the bank today. The bank’s latest investments into more technologically forward endeavors, including the acquisitions of HelloWallet, Laurel Road, AQN Strategies, and XUP Payments. Laurel Road is a key growth engine for the bank today, using a digital national platform approach. KeyCorp’s noninterest income comes primarily from investment banking and asset and trust management services. While noninterest income did not grow substantially for the decade prior to 2019, the bank has turned a corner here. KeyCorp is expanding its relatively new credit card income base as well as its own mortgage and capital markets operations. These efforts have largely paid off, and the fees will be consistently higher from 2020 forward than they were for the previous decade. The bank shall continue to remain very competitive in its core middle-market niche, while also building out its focused retail operations.
Financial Strengths:
KeyCorp is in adequate financial health. The bank has performed well through the pandemic, with credit costs being very manageable. The bank’s common equity Tier 1 ratio of 9.4% as of March seems adequate to us. The capital-allocation plan remains fairly standard for KeyCorp, with a focus on investing in organic growth and extra capital being used to fund share buybacks and pay a dividend. Management targets a 40%-50% dividend payout ratio with much of the rest used for share buybacks if no organic investment opportunities present themselves. Bolt-on acquisitions also remain a possibility.
Bulls Say:
Company Description:
With assets of over $170 billion, Ohio-based KeyCorp’s bank footprint spans 16 states, but it is predominantly concentrated in its two largest markets: Ohio and New York. KeyCorp is primarily focused on serving middle-market commercial clients through a hybrid community/corporate bank model.
(Source: Morningstar)
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