Banking On Value – KeyCorp (KEY)

Following the failure of First Republic (FRC), regional bank stocks have come under renewed pressure. In The Prudent Speculator’s latest special report, Banking on Value – Revisited, I discuss the latest goings on and separate fact from fiction. I also offer actionable advice from our Value Investing perspective, including three additional undervalued stock selections to go along with the one featured below.

Operating performance for Cleveland-based KeyCorp
KEY
in the latest quarter left a lot to be desired, but the Midwest regional bank’s conservative posture has so far kept it out of trouble in the latest banking crisis.

KEY earned $0.30 per share in Q1, down from $0.45 in 2022 and $0.38 in Q4, as higher deposit costs cut into net interest margin. Deposits grew, however, as did earning assets, keeping the loan-to-deposit ratio stable since the end of Q4. Noninterest income sources also remained under pressure with most categories like trust & investment income, investment banking and corporate services down versus both last quarter and the prior year.

Concurrently, higher personnel and other costs drove noninterest expenses 10% higher year-over-year and worsened the efficiency ratio by 8% from Q4 to 68%.

Nonetheless, CEO Chris Gorman stated, “Key’s durable business model continues to provide stability while driving sound, profitable growth through all market conditions. Our strong balance sheet and our focus on relationship banking yields a diverse, stable deposit base and high-quality lending opportunities. Importantly, our long-standing commitment to primacy continues to serve us well, resulting in an increase in period-end deposits on a linked quarter basis. As a strong, core-funded institution, we are well positioned to continue to serve and support our clients and prospects.”

While fee generating segments have experienced a lull, KEY’s diversification across both core and noninterest banking has generally added stability in recent years. In addition to fears about the entire industry, management’s tempered outlook for net interest income has weighed on the shares but owners are still rewarded for their patience with a remarkably inexpensive valuation of 6 times forward EPS estimates and a dividend yield over 8%.

And we might add that Andrew “Randy” Paine, who heads institutional banking at KEY, made an open market purchase of 75,000 shares of the stock on May 3 at an average price of $9.78, spending more than $730,000 on the transaction.