STT State Street Corporation

On Mar 22, 2013, we reaffirmed our Neutral recommendation on KeyCorp (KEY) based on its in-line results, meaningful capital deployment actions and expense reduction initiatives. However, pressure on net interest margin (NIM), persisting slow economic recovery and a stringent regulatory landscape remain the major causes of concern for this Zacks Rank #3 (Hold) stock.

Why the Neutral Stance?

KeyCorp’s fourth-quarter 2012 earnings were in line with the Zacks Consensus Estimate and the year-ago earnings. Top-line growth, continued improvement in credit quality and robust capital ratios were the positives for the quarter. However, higher operating expenses offset the positives.

Further, in the past 30 days, only a few estimates have moved up, keeping the Zacks Consensus Estimate for 2013 unchanged. Similarly, estimates for 2014 have remained flat over the same period. In addition, over the past 4 quarters, the company has delivered average earnings surprise of 10.8%.

Recently, after receiving the Federal Reserve’s approval, KeyCorp announced a $426 million share repurchase program, which will be executed by Mar 2014. The company also plans to hike its quarterly dividend by 10% from the present $0.05 per share starting the second quarter. This makes KeyCorp a sound asset for yield-seeking investors. In addition to controlling the rising expenses, management at KeyCorp chalked out an expense reduction program with an aim to rationalize the cost structure. The company intends to reduce expenses by $150 – $200 million by the end of this year. It also plans to reduce occupancy costs and consolidate nearly 5% of its branch network.

Yet, pressure on NIM remains a primary concern for KeyCorp. Though the company has been benefiting from improved funding costs and better earning asset yield since the second half of 2009, we expect the margin pressure to remain in place in the near term due to the soft new loan demand. In addition, market dislocations over the last couple of years have led to deterioration in the valuation of many of the asset categories in KeyCorp’s balance sheet, thereby lowering its ability to sell assets at acceptable prices.

Going forward, a slow economic recovery and stringent regulatory landscape are likely to add to its woes.

Other Stocks to Consider

Stocks that are performing better than KeyCorp include Citigroup Inc. (C), State Street Corporation (STT) and BankUnited, Inc. (BKU). All these stocks carry a Zacks Rank #2 (Buy).

 
BANKUNITED INC (BKU): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
KEYCORP NEW (KEY): Free Stock Analysis Report
 
STATE ST CORP (STT): Free Stock Analysis Report
 
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