KeyCorp (NYSE: KEY) is a regional bank holding company that still likely has a long way to go before its turnaround has kicked into high gear. Now the bank is finally on the right side of the earnings game, and with a recent $2.8 billion investment injected in capital by Bank of Nova Scotia (NYSE: BNS) now it’s time for KeyCorp to keep cleaning up its balance sheet and recovering some of its post-rate-hike losses.
After rising 2.3% to $18.71 after earnings on Tuesday, KeyCorp just had its highest close since last November. This is actually still considerably short of its $20.04 high over the last 52-week period, and KeyCorp was up above $25 in early 2022 before the Federal Reserve’s rate-hike campaign went into overdrive.
Oggonomics has been a steadfast watcher of KeyCorp because its BNS stake taken in 2024 put the super-regional bank into the “strategic” and “special situation” classifications. It was also a lurking value stock with better than a 5% dividend yield at the time. Its dividend of 4.5% at the present time is still stronger than most peers. And that dividend yield even at the present time is still double that of money-center banks like BofA, JPMorgan Chase and Wells Fargo.
INDEPENDENT ANALYST GIVES KUDOS
The independent research firm Argus already had a Buy rating on KeyCorp but its price target was hiked to $21 from $17 after the earnings report. Argus points out that the regional bank’s balance sheet re-positioning is making concrete progress. The firm pointed out that the Q2 report of $0.35 in earnings per share was a penny above consensus and it was a full 10-cents above a year earlier.
Another driver for KeyCorp’s bullish report is that its management commentary walked guidance higher for 2025. The bank is now calling for an increase of 20% to 22% in net interest income (versus a prior 20%) and forecasting that net interest margin will hit 2.75% by Q4-2025 (versus a prior 2.70%). Those margins are being driven by significant securities re-positioning efforts that caused pain in the second half of 2024 ahead of the BNS $2.8 billion investment for a 15% stake.
KeyCorp’s equity ratio also improved, KeyCorp estimated a Basel III Tier 1 common equity ratio of 11.7% as of June 30 (versus 10.5% a year ago). Argus also pointed out that Q2 net charge-offs of $102 million were up from $91 million a year ago — and net charge-offs over the last four quarters hit $480 million, versus loan loss provisions of $390 million. That new capital from BNS helped smooth this process handily.
The price target hike reflects “notable improvement in the net interest margin” but the independent research report still cautions of some metrics having to be digested ahead. Argus noted that its ending balances are likely to remain under pressure. This reflects “still weak client demand” for loans, flat utilization rates, and an intentional runoff of low-yielding consumer loans as they pay down and mature. Still, Argus sees a better second half of 2025 for the lending business and sees continued net interest margin improvement as its balance sheet repositioning efforts should continue to show benefits.
One interesting aspect about KeyCorp is that the Cleveland-based company is considered to be large yet somewhat out of regulatory dominance like the systemically important institutions. It counts about 1,000 branches spread over 15 states and an asset base of $186 billion, but the bank still remains outside of Federal Reserve oversight of those post-GFC “Stress Tests” that the Fed imposes on the systemically-important financial institutions. Argus even noted:
We view the company in a relatively good position with respect to regulatory oversight for regional banks. At its asset-size of $185 billion, the company is not subject to annual Federal Reserve stress tests, which apply only to banks above $250 billion in assets.
Stephen Biggar is that analyst behind this higher price target. The target hike was based on a discount to peer regionals and improving metrics. The report said:
KeyCorp’s tangible book value was $12.86 per share as of June 30. At current prices near $18, KEY trades at approximately 1.4-times tangible book value and at 12.7-times our 2025 EPS estimate, a discount to regional bank peers. We believe that these discounts are unwarranted given the company’s favorable ROE and efficiency metrics and strong credit quality. Our target price of $21 (up from $17) implies a multiple of 14.5-times our 2025 EPS estimate.
BofA BUMPS IT UP, TOO
It was just back on June 16 that BofA Securities reiterated its Buy rating and raised its price objective to $20 from $18 based on growth and value simultaneously. And now we have another price objective boost to $21 from $20 after earnings.
BofA’s new price objective targets stronger revenue growth, raised guidance, rebounding client activity, the return of capital (modestly), and a compelling risk/reward to position the regional bank for a capex rebound. Some additional commentary:
- Management sounded bullish (on the call) highlighting expectations for a significant ramp up in capex
- Healthy lending pipelines and active client engagement
- KEY offers a compelling risk/reward trading at 10.6x 2026 P/E and 1.4x year-end tangible book value
BofA’s Investment Rationale says:
We believe that management’s laser focus on organic growth (seven industry verticals, West Coast) and preparing KEY for a digital first banking world is not fully appreciated by the investor community. Improved visibility on growth potential should drive a secular re-rating in stock valuation, in our opinion.
ELSEWHERE ON WALL STREET
Morgan Stanley reiterated its In-Line rating and kept its $20 price target in place. The firm noted that loan growth is coming in stronger than expected with momentum into year-end, and the bank’s slight boost to net interest income guidance was in-line with Morgan Stanley’s estimates and consensus estimates. The firm is now modelling fee based operating leverage in 2025/2026 and raised 2025/2026 earnings expectations by 1%.
A week or so before earnings, UBS noted that large regional banks have materially lagged behind money-center peers since Liberation Day and the worst case scenarios on the economy from tariff policies are off the table now. UBS upgraded KEY to Buy from Neutral with a $22 price target on July 7. UBS believes KEY will be an outsized beneficiary, has a superior capital arsenal, has strong loan growth momentum, has exposure to a capital markets recovery, and maybe even net interest income upside surprises. UBS expects earnings upgrades and multiple expansion, improved tangible book value, and the bank is now valuing KEY at 13-times forward earnings from 11-times.
And on July 8, Wells Fargo reiterated its Overweight rating and raised its price target to $20 from $18 in the call.
On June 30 RBC Capital Markets reiterated its Outperform rating and raised its target to $19 from $17 with strong valuation metrics versus peers.
THE Strategic “MAYBE” EXIT…
There remains a potential strategic nature or special situation regarding KeyCorp that was not featured in the Argus report nor in other reports. And if it does play out it’s not likely to play out any time in the immediate future. KeyCorp is considered to be potential takeover bait for BNS, although cross-border regulations may prevent or delay such a move as Canada-US relations are strained and in the midst of tariff and trade negotiations.
Regardless, the capital infusion in 2024 helped KeyCorp shed those lower-rate loans from its books without as hard of a financial hit. And KeyCorp should be very thankful that BNS wanted to look south of its border for expansion and/or investment opportunities. That investment also significantly helped KeyCorp’s stock set in a potential floor.
If investors are playing KeyCorp for a potential merger they might be waiting some time. Initial thoughts around the KeyCorp investment put a would-be merger several years out — and a lot can happen between now and then.
DISCLAIMERS
Please be advised that the analyst ratings and price targets mentioned above were issued by each firm named in this reporting. Their ratings and targets may be significantly different that ratings and price targets from other analyst calls that may be issued. Investors need to always keep in mind that analysts sometimes get their thesis and outlook wrong. And sometimes the fundamentals of a company, its sector or the economy as a whole can change in an instant.
Oggonomics does not issue any formal ratings and does not maintain any price targets of its own in the companies mentioned in this report. Interpretations of how positive or negative the analyst calls are can also wildly vary from investor to investor.
No analyst ratings and their price targets, even those with the strongest conviction or strongest pessimism, ever come with any guarantees of profits. Analysts reports also never have money-back guarantees in the event that investors lose money.
