2023-11-28 10:37:50 ET
Summary
- KeyCorp has risen 21% since my July strong buy rating, so is due for downgrade to Hold, being less bullish than the current consensus.
- It remains a strong dividend grower with near 7% dividend yield.
- Challenges include weak earnings and revenue driven by lower net interest income.
- The risk of exposure to bad loans or office properties seems to be very low right now.
Stock Overview
Regional banks I have not forgotten about you, so today I am revisiting a stock I covered back in July, regional bank KeyCorp ( KEY ).
Since my last rating of a strong buy , it appears I called it accurately since it has gone up over 21% since July :
KeyCorp - performance since last rating (Seeking Alpha)
However, today I'll be applying my updated and more extensive methodology to this stock after its most recent quarterly earnings.
Rating Methodology
The stock's rating is based on its WholeScore , which is my approach to holistically rate a stock by considering 13 metrics of equal weight I think are relevant to investors and analysts. Key financial data presented is sourced from Seeking Alpha as well as the company's recent FY2023 Q3 earnings release that came out on October 19th.
Revenue Growth vs Peers
The table below I created compares my focus stock KeyCorp with 4 other peers in the diversified banks sector, with an eye towards more regional banks rather than large national or global ones like a Citigroup ( C ), for example.
In this peer group, KeyCorp saw a negative -13.6% YoY revenue growth, hitting the bottom of the pile, while Dallas-based Comerica ( CMA ) was the leader.
KeyCorp - growth vs peers (author analysis)
My target as usual was for beating the average by 5%, which it missed and so did not get a point score from me here.
In trying to understand drivers of this revenue decline, a key top-line metric in this sector to follow is net interest income ((NII)), the difference between interest revenue and interest costs. A spike in interest costs seems to have been a driver of declining revenue for this bank:
Revenue Growth ( YoY )
A key metric from the income statement is the revenue. In this case, the company saw a near 17% decline in YoY revenue when comparing with the same quarter a year prior.
This missed my 5% YoY growth target and lost another potential score point.
KeyCorp - revenue YoY growth (author analysis)
What I can say on a positive note, however, looking ahead to 2024 what gives me confidence in this bank is their outlook for 2024 net interest income:
Earnings Growth ( YoY )
Also from the income statement, we see the bottom line also suffered a 44% YoY decline , missing my 5% growth target and losing a score point.
KeyCorp - earnings YoY growth (author analysis)
Looking at the income statement, total non-interest expenses only went up from $1.1B to about $1.11B, so practically flat, however it appears that rises in interest costs really spiked:
Since the Fed has held rates steady for now, and CME Fedwatch predicts a 97% probability rates will remain the same after the December 13th Fed meeting, I anticipate this interest-expense headwind to continue for some time, but not grow too much worse since there appears to be very low probability for now the Fed will hike rates even higher again soon, with just a 3.2% chance according to CME Fedwatch.
Cashflow Growth (YoY)
Although someone in the comments recently said that cashflow is not a vital metric to look at for the banking industry, as a policy I still include this metric as with any stock I cover, because fundamentally I think positive cashflow is important to any business.
The good news is this company has positive free cash flow per share, however it has declined about 75% on a YoY basis , missing my 5% growth target and losing a point here.
KeyCorp - cashflow YoY growth (author analysis)
I know that dividend payouts, capital expenses, and share repurchases can impact cash so that is something to consider. Later on, I will discuss why this company is a steady and growing dividend payer, for dividend-income oriented investors like myself.
To spur a productive discussion in the comments section, I welcome your thoughts on how much relevance you think free cashflow growth has to a bank, and why or why not?
Equity Growth (YoY)
From the balance sheet data, I made the comparison table below which highlights a very slight YoY gain in equity , positive however still missing my 5% growth target and losing a potential point.
KeyCorp - equity YoY growth (author analysis)
It appears one metric that drove the increase was an increase in retained earnings , appearing on the equity side of the balance sheet.
3 Year Dividend Growth
The picture looks rosier on the dividends front, with a nearly 11% dividend growth when comparing the quarterly dividend from November 2023 with that of November 2020.
KeyCorp - dividend 3 yr growth (author analysis)
This is good news for a dividend-income investor, and shows signs of capacity to return capital back to shareholders but also potentially grow that income and source of cashflow for dividend investors.
Dividend Yield vs Sector
Also in the dividends category, who can ignore the nearly 7% dividend yield on a forward basis, which easily beat its sector average by almost 85% and beat my own 5% target, earning another score point here.
KeyCorp - dividend yield vs sector (author analysis)
Although this may be more relevant if I was looking to buy at this time, and snatch such a high dividend yield, an even better buy price and yield could have gotten snatched up if buying this spring and summer actually, and next I will briefly go over the price chart.
Share Price vs Moving Average
The share price (as of the writing of this article on Nov. 27th) is hovering very close to the 200-day simple moving average, as shown in the YCharts below, and seems to have slightly rebounded from its lows this fall.
Although those price dips below the 200-day average is what my portfolio strategy is looking for, I think that it still presents a somewhat decent buy price as it practically hovers around the average right now, so I will give it a score point here.
KeyCorp - share price vs moving avg (author analysis)
However, if I was buying at $11.71 I would probably do so as a long-term dividend income play, to add to an existing portfolio of diversified bank stocks that include some global banks as well as regionals. Again, that nearly 7% dividend yield should be considered.
Price Return vs S&P500
What can I see about the market momentum of this stock other than it has been weak, with a 1 year price return of negative 37%, a whopping 377% below the S&P500 index. This missed my target of outperforming the index by 5% or better.
KeyCorp - return vs S&P500 (author analysis)
By comparison to some peers, Comerica ((CMA)) also had weak momentum with a 1 year price return of -38.4%, while Canada's Bank of Montreal ( BMO ) saw a 1 year return slightly better at -17.79%, according to Seeking Alpha data.
Unlike the big-tech heavy S&P500 index, and the craze over "AI" and tech stocks this spring as investors fled regional banks in the wake of the Silicon Valley Bank collapse, I think what we can expect going forward therefore is mostly upside from this sector, as I am not sure how much more beaten down it will get as any risks of asset exposure or credit risk are probably already priced in by now, in my personal opinion.
P/E Ratio
What we can learn from valuation data is that this stock is somewhat overvalued when it comes to forward P/E ratio, and since I am looking for undervaluation it missed my goal and lost a potential point here.
KeyCorp - P/E ratio (author analysis)
In tying this valuation back to the financials discussed, I think this overvaluation stems from the 44% drop in earnings combined with the slight spike in share price. Earnings will definitely have to improve by a lot in the Q4 results to balance this valuation out, to get it closer to the sector average 9.7x earnings. That remains to be seen, considering that this stock missed 3 of the last 4 earnings estimates and the Q4 estimate is for a YoY decline.
Personally, I think the net interest income issue mentioned earlier may continue to weigh on earnings.
P/B Ratio
Also in valuation, I looked at the P/B ratio and created the table below that shows undervaluation with a forward P/B of 1.0, almost 5% below the sector average. It met my target for undervaluation and scored another point here.
KeyCorp - P/B ratio (author analysis)
Keep in mind, as mentioned earlier, this company has over $13B in positive equity and a YoY equity improvement to book value, while the share price is currently hovering around the 200 day average, so I think this type of Price to Book Value of 1x is where I would like to be at with this stock.
Return on Equity
From the profitability metrics, you can see that the trailing twelve month return on equity has underperformed the sector average by over 9% , so common stockholders of KeyCorp are getting less of a return on their investment than the sector is averaging. Because of this, I also did not give it a point here.
KeyCorp - ROE (author analysis)
I think what is driving this number is not low equity levels but rather poor earnings, and as we saw a significant YoY decline in earnings for several of the last quarters.
The reason I put so much focus on accounting statements in my analysis is because they tell a story about a company, and the ability to grow profitability year-over-year I think is a relevant metric to consider when comparing stocks to invest in. I am not just buying shares, but rather buying into that company's ability to grow earnings each year, the way I see it.
What are your thoughts on this? Do share them in the comments!
Risk Score
At last, we can talk about some risks of this company. The two risks to consider in this type of business are credit risk and asset exposure risk .
If you look at the following graphic, you can see that the net charge-off ratio has only slightly risen on a YoY basis and hovering around 0.24%, while provisions for credit losses has dropped. Also, the 90-day delinquency rate is only 0.04%.
In terms of asset exposure, one area of concern is exposure to office properties in a commercial real estate ((CRE)) portfolio, and many banks hold a significant book of commercial property loans.
According to the graphic below, however, office loans are a very small (0.7%) portion of total loans, and have little to no 90+ day delinquencies. The biggest exposure to assets seems to be multifamily residential.
With that said, I created this risk table and determined that both risk impact and probability are low, and so gave this stock another score point here.
KeyCorp - Risk Score (author analysis)
WholeScore Rating
Today's re-rating led to a downgrade from my previous strong buy rating to a neutral /hold rating right now, as this stock's WholeScore of 5 puts it in neutral territory.
KeyCorp - WholeScore (author analysis)
Comparing to the rating consensus, I am being less bullish this time than the consensus which seems to agree on a buy rating. For the reasons mentioned, I don't think it presents a "great" buy opportunity overall right now when looked at holistically.
KeyCorp - rating consensus (Seeking Alpha)
Summary and Forward Outlook
Today's hold rating was driven by some of the following positives: dividend growth and near 7% yield, modest share price, low risk score, undervalued on price-to-book value.
Some negatives included weak earnings and revenue growth, underperformance vs the S&P500 index, and weak return on equity compared to its sector.
This time around I see this as a dividend-income opportunity to hold on to, and will include it in my dividend quick picks of the week.
For further details see:
Regional Bank KeyCorp Rated Hold For Dividend Growth And Near 7% Yield (Downgrade)