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KeyCorp a Solid Play for Interest Rates, Efficiency: Oppenheimer

According to the Federal Deposit Insurance Corporation, the U.S. banking industry's aggregate net interest margin narrowed to 3.27% during the first quarter from 3.35% the previous quarter and 3.51% a year earlier.

With the market rate on 10-Year U.S Treasury bonds rising considerably over the past few weeks and contradictory comments among Federal Reserve Chairman Ben Bernanke and other members of the Federal Open Market Committee, the biggest question right now for investors is whether the Federal Reserve might decide to curtail its bond-buying at the next FOMC meeting beginning on June 18.

If short-term rates remain in their current range, which is quite possible even if the Fed limits its bond-buying and long-term rates rise more, short-term rates may remain in their current range for quite some time. This will benefit KeyCorp. "From 2Q13 to 2014, $6.3B of CDs are maturing with an average rate of 1.40%, and $1.1B with average rates of 2.60% are maturing in 2015 and beyond," McEvoy wrote.

And if long-term and short-term rates rise together, KeyCorp should still benefit, as the company describes itself as "moderately asset sensitive," meaning its assets will reprice upward faster than its liabilities.

Another major advantage for KeyCorp and its shareholders is a strong capital base, which can feed expansion in more profitable business lines, or can be used to repurchase shares, those lowering the share count and boosting EPS. KeyCorp's March 31 Tier 1 common equity ratio was 11.4%, according to McEvoy, which was considerably higher than the 10.0% average for 12 large regional banks covered by his firm.

KeyCorp has a program in place to repurchase up to $426 million in common stock through the first quarter of 2014. The company pays a quarterly dividend of 6 cents on common shares, for a yield of 2.04%, based on Friday's close.

Most large-cap banks are focused on cutting expenses, and KeyCorp is no exception, with the goal of its "Keyvolution" program to reduce the bank's efficiency ratio to a range of 60% to 65%. KeyCorp reported a first-quarter efficiency ratio of 66.0%, improving from 67.7% a year earlier. The efficiency ratio is, essentially, the number of pennies of overhead expenses incurred for each dollar of revenue.
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