Does KeyCorp Hold the Key to a Fortune?

KeyCorp benefits from strong industrial and commercial loan growth and should see further growth in profitability and book value in the years ahead.

Jul 7, 2014 at 11:16AM

Source: Company

KeyCorp (NYSE:KEY) is a strongly growing regional bank which has even more potential to increase value for shareholders over the coming years. KeyCorp stands out with above-average loan growth rates, a concentration on expense management -- which has been bearing fruit -- and a consistently rising book value.

Despite high profitability and strong underlying business drivers, KeyCorp is not too expensive yet and still offers investors an attractive risk/reward ratio.

KeyCorp belongs to the second-tier league of financial institutions in the United States. With total assets of $90 billion, deposits of $66 billion, and a market capitalization of approximately $13 billion, KeyCorp is an interesting alternative to other, more well-known banking franchises.

KeyCorp has made substantial progress over the last couple of years to position itself for further growth. Increases in consumer spending, higher loan demand, and an improving U.S. housing market should provide critical boosts to KeyCorp's bottom line in the years ahead.

Loan growth
As a regional bank, KeyCorp largely depends on strong loan growth in order to facilitate lending activities to institutional and retail customers.


Source: KeyCorp Investor Presentation

It has done a superb job in the past.

KeyCorp's average total loans have increased 4% to $54.7 billion from the first quarter in 2013 to the first quarter in 2014. Commercial, financial, and agricultural loans were a primary driver for loan growth.

The commercial side of the business has been doing quite well for a while now, and little points to decreasing loan growth momentum in the coming quarters.

KeyCorp's commercial and industrial loans grew by more than 54% since the first quarter in 2011, and the upward demand trend clearly seems intact.

With further growth in the U.S. economy, KeyCorp should experience material tailwinds for its important commercial and loan business.

Book value growth
KeyCorp has proven itself by consistently achieving high levels of profitability.


Source: KeyCorp Investor Presentation

Profitability metrics such as the return on average tangible common equity can be quite volatile from quarter to quarter, but KeyCorp achieved a high average of 10.02% in each of the last five quarters.

With that high level of profitability, it comes as no surprise that KeyCorp's book value has steadily been growing as well.

In the first quarter of 2014, KeyCorp reported a book value of $11.43. This compares against $10.89 in the first quarter of last year, reflecting a 5% year-over-year increase. Again, the trend in KeyCorp's book value growth is robust and suggests that the bank will be able to capture further growth in the upcoming quarters.

Since KeyCorp presently trades at around $14.50, investors pay only a 27% premium to book value or a 42% premium to tangible book value which isn't too expensive given KeyCorp's profitability record.

Rigid cost management
KeyCorp's noninterest expenses have declined 3% from $681 million in the first quarter of 2013 to $662 million in the first quarter of 2014 and the bank intends to cut noninterest expenses further in 2014. Overall, KeyCorp expects to reduce noninterest expenses by low to mid-single digits in 2014 compared to fiscal year 2013, which saw total noninterest expenses of $2.8 billion.


Source: KeyCorp Investor Presentation

KeyCorp's cash efficieny ratio also shows material improvement over the last two years, indicating that KeyCorp has made substantial progress in controlling the cost side of its business.

The bank also intends to push the cash efficiency ratio down to a target range of 60-65% over the next two to three years. In the first quarter of 2014, KeyCorp already achieved a cash efficiency ratio of 64.9%.

Rewarding shareholders
As usual, KeyCorp rewards its shareholders with dividends and share buybacks. In the first quarter of 2014 alone, KeyCorp repurchased $141 million worth of shares. Investors can reasonably expect more share buybacks down the road if KeyCorp's can sustain its high profitability.

In addition, KeyCorp just hiked its quarterly dividend by 18% from $0.055 to $0.065 in the second quarter, leading to a 1.80% dividend yield that investors can pocket on the side.

The Foolish bottom line
KeyCorp convinces with strong loan growth and strict expense management, both of which underpin its high profitability. The bank regularly achieves double-digit returns on equity and rewards shareholders with dividend increases and share buybacks which should support KeyCorp's share price going forward.

At the same time, KeyCorp only trades at a 27% premium to book value or a 42% premium to tangible book value. This does not appear to be too expensive given the metrics presented above.

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Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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