What the Market Missed About KeyCorp's Earnings

Yes, we know that KeyCorp (NYSE: KEY  ) reported $0.21 in earnings per share in its fourth-quarter earnings announcement this morning. But while the market was focusing on that number, it missed what was really important in KeyCorp's quarter.

What you missed
The market seems to be reacting negatively to the reduction in net income during the quarter. After reporting $214 in net income during the last quarter, net income declined to $193 million during the fourth quarter. Part of the decline was due to $16 million in costs associated with its "Fit for Growth" initiative. While this program ideally will make the bank more efficient and profitable down the road, we may still see costs associated with its implementation in the coming quarters.

Beyond the earnings
I think that it's odd that the market is reacting as it is. Everything seems to be up from the fourth quarter of last year. Net interest income increased 7.8% since December 2011, primarily driven by a 24-basis-point increase in net interest margin. Average total loans were also up 6.6% over the course of the year, led by commercial and industrial loan growth over 21%. Finally, total deposits also saw a gain during the year, up a total of 7.3%.

So what is scaring investors off? Nonperforming loans increased slightly during the quarter, but I don't think that it was material enough to warrant the kind of reaction KeyCorp has received this morning. It truly appears that the slight retreat in net income is responsible for the market's reaction, and I think the reaction is a little bit of an overreaction.

An opportunity presents itself
There wasn't a whole lot not to like in KeyCorp's earnings release, but the market doesn't seem to agree. It could ultimately make the bank an affordable option for investors looking for a bank that has some room to grow. It currently trades at a nearly 20% discount to book value and boasts a 2.1% dividend with plenty of room to grow. It may be time to be greedy when others are fearful.

The road to post-crisis recovery hasn't been as fast for all regional banks as it has for KeyCorp. Regions Financial is showing signs of life in the wake of the lumps it took during the downturn, but does that mean that its stock is a buy today? To help you figure that out, I invite you to read our premium research report on the company today. Click here now for instant access!


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