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KeyCorp: Buyback Anticipation Winner

"So the best choice is to find an acquisition that you can get a lot of cost efficiencies out of, or give money back to shareholders," Day says.

Following the Fed's announcement last week of the results of its annual stress tests for the largest 18 banks, Citigroup (C) dispelled any speculation by announcing it had requested Federal Reserve approval for $1.2 billion in common share repurchases through the first quarter of 2014, while keeping its quarterly dividend at a nominal 1 cent a share.

Please See TheStreet's Capital Return Preview for more on what investors may hear from the largest U.S. banks on Thursday.

KeyCorp fared quite well in the stress tests, with the Federal Reserve projecting that under the "severely adverse scenario" of a brutal recession beginning in 2013, the bank would lose $2.4 billion through the end of 2014, with a minimum Tier 1 common equity ratio of 8.0%. That indicates plenty of excess capital, above the minimum Tier 1 common ratio of 5.0% required for the bank to be considered well-capitalized.

KeyCorp's shares trade slightly above their reported Dec. 31 tangible book value of $9.67, and for 10.5 times the consensus 2014 EPS estimate of 95 cents a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 86 cents. Based on a quarterly payout of 5 cents, the shares have a dividend yield of 2.00%.

Credit Suisse analyst Craig Siegenthaler in a report on Sunday called KeyCorp one of three "cheap banks" -- along with Regions Financial (RF - Get Report) of Birmingham, Ala., and Comerica (CMA - Get Report) of Dallas -- for which "the share repurchase option is the most attractive" way to deploy excess capital.

Siegenthaler estimates that KeyCorp will be approved to pay dividends totaling 23 cents a share in 2013, while receiving Federal Reserve approval for share repurchases totaling $590 million. That would make for a potential total capital return of $795 million, or 97% of estimated 2013 earnings.

Regions Financial currently pays a nominal quarterly dividend of 1 cent a share. Siegenthaler estimates the bank will be approved by the Fed to pay dividends totaling 13 cents a share this year, with $264 million in buybacks, for a potential capital deployment totaling $444 million, or 38% of estimated earnings.

Comerica is paying a quarterly dividend of 17 cents, for a dividend yield of 1.87%, based on Wednesday's closing price of $36.45. Siegenthaler estimates the company will pay total dividends of 69 cents a share this year and be approved by the Fed for share repurchases totaling $322 million. That would make for a potential capital return totaling $448 million, or 87% of earnings.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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