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Bank Stocks Tumble on Mixed Economic Data

NEW YORK ( TheStreet) -- Large-cap U.S. bank stocks were very weak on Thursday, as a reported decline in manufacturing activity in China outweighed another decent set of domestic unemployment numbers.

The Dow Jones Industrial Average (^DJI) ended 1.1% lower, while the S&P 500 (^GSPC) saw a 0.9% decline, and the Nasdaq Composite (^IXIC) declined 0.6%, after the ash Markit/HSBC Purchasing Managers' Index for China showed the first contraction of manufacturing in six months.  The final preliminary index reading for January was 49.6, down from December's final reading of 50.5. A reading below 50 indicates contraction.

Back home, the January Markit "flash" PMI manufacturing index for January was 53.7, declining from the final December reading of 55.  Economists polled by Thomson Reuters had on average estimated the January figure would come in at 55.

The Department of Labor said initial unemployment claims for the week ended Jan. 18 rose by 1,000 to 326,000, which was the level expected by economists. The four-week moving average for unemployment claims 331,500, declining by 3,750 from the previous week's average.

The KBW Bank Index (I:BKX) was down 1.6% to 70.25, with all 24 component stocks ending with significant declines. 

The sector loser on Wednesday was KeyCorp (KEY - Get Report) of Cleveland, with shares down 3.5% to close at $13.65, after the company's fourth-quarter earnings came in slightly ahead of expectations, with earnings growing 20.5% year-over-year.

KeyCorp CEO Beth Mooney has been emphasizing the company's major cost-cutting efforts over the past year, however, many analysts believe the stock price already reflects any additional cost savings, along with the company's growth in average loans and fee income.  KeyCorp's stock rose 62% during 2013, compared to a 35% return for the KBW Bank index.

Bank of America Merrill Lynch analyst Erika Najarian in a client note on Thursday reiterated her "neutral" rating for KeyCorp, writing, "It is not a surprise then that the market is disappointed with the expense guidance, which calls for a low single digit decline off a $2.82bn [annual] base -- a base that includes repositioning charges."  The analyst lowered her 2014 earnings estimate for the bank to $1.06 a share from $1.04, "implying a full-year cash efficiency of 64% -- only a modest improvement from the 4Q13 ratio of 65%."  The efficiency ratio is the percentage of overhead expenses to revenue.

Najarian raised her 2015 EPS estimate for KeyCorp to $1.14 from $1.12, on the likelihood of reduced provisions for loan loss reserves.

Oppenheimer analyst Terry McEvoy has a neutral "perform" rating on KeyCorp, estimating the bank will earn $1.06 a share this year and $1.18 a share during 2015.  McEvoy wrote in a client note that "finding the incremental buyer of KEY is going to be harder in 2014 given the stock's massive outperformance in 2013. Fourth-quarter earnings were basically in line but combined with management's outlook not enough to either raise our estimates or change our view on the stock."

"Returning capital will continue to be important to Key and their shareholders," McEvoy added. Investors will find out more about the bank's plans for increasing dividends and for share buybacks after the Federal Reserve completes its annual stress tests and capital plan reviews in March.

KeyCorp's shares trade for 12.2 times the consensus 2015 EPS estimate of $1.12. The consensus 2014 EPS estimate is $1.01.

The following chart shows KeyCorp's performance against the KBW Bank Index and the S&P 500 since the end of 2011:

KEY Chart KEY data by YCharts


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

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 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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