) -- The recent run-up in


(KEY) - Get Report

stock price doesn't make much sense, according to KBW analyst Christopher Mutascio.

KeyCorp's shares closed at $10.23 Tuesday, returning 22% this year, outperforming the performance of the

KBW Bank Index


, which was up 14% year-to-date through Tuesday's close at 58.28.

The shares have also outperformed the KBW bank index since Feb. 14, the day before Mutascio took over KBW's coverage of the bank, with an "underperform" rating and a price target of $9.00. Since the market close on Feb. 14, KeyCorp's stock has returned 8%, while the KBW Bank Index is up 5%.

Shares of KeyCorp of Cleveland trade for 10.7 times the consensus 2014 earnings estimate of 96 cents, among analysts polled by

Thomson Reuters


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"It seems to us that the market is implying that: 1) our EPS estimates are too low, 2) investors are more willing to apply a premium P/E multiple to the shares than we are, or 3) a combination of both," Mutascio wrote.

Mutascio estimates KeyCorp will earn 91 cents a share during 2014. "If you assume investors require a 15%-20% upside from today's share price in order to obtain an adequate return over the next 18 months, then it implies a target price for KEY of approximately $12 per share," he wrote.

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Based on the higher 2014 consensus estimate of 96 cents, a price of $12 for KeyCorp's stock would make for a forward price-to-earnings ratio of 12.5, rising to 12.9 if 2014 EPS ranges from 91 cents to 96 cents. According to Mutascio, "that seems like an awfully high P/E multiple for a bank expected to generate a

return on average assets, or ROA of less than 1.0% and a

return on tangible equity, or ROTE of less than 9.0% based on the current EPS estimates."

KeyCorp's first-quarter ROA was 0.99%, while its return on average tangible common equity (ROTCE) was 9.12%. Here's how the market's apparent logic for valuing KeyCorp's shares, according to Mutascio, would stack up for four other large regional banks, all of which are expected to be more profitable than KeyCorp during 2014:

  • Wells Fargo's (WFC) - Get Report first-quarter ROA was 1.41% and its ROTCE was 17.76%. The shares closed at $38.40 Tuesday, trading for 10.1 times the consensus 2014 EPS estimate of $3.81. That's lower than KeyCorp's forward price-to-earnings multiple, and probably reflects the political and regulatory "target on the back" for the largest U.S. banks. KBW is ahead of the consensus, with a 2014 EPS estimate of $3.93. Applying the 12.9 forward P/E multiple discussed above to KBWs 2014 EPS estimate would lead to a price target of $51 for Wells Fargo, for upside of 33%.
  • U.S. Bancorp (USB) - Get Report of Minneapolis achieved a first-quarter ROA was 1.65% and its ROTCE was a whopping 23.79%. The company has consistently been the best earnings performer among the 24 components of the KBW Bank Index through and after the credit crisis. The shares closed at $33.15 Tuesday, trading for 10.2 times the consensus 2014 EPS estimate of $3.24. It is remarkable to see U.S. Bancorp trading at a lower forward P/E than KeyCorp. Based on a multiple of 12.9 to KBW's 2014 EPS estimate of $3.25, USB would have a price target of $42, for potential upside of 27% from Tuesday's closing price.
  • For BB&T (BBT) - Get Report of Winston-Salem, N.C., the first-quarter ROA was 1.11% and the ROTCE was 8.25%. The shares closed at $31.51 Tuesday, trading for 10.2 times the consensus 2014 EPS estimate of $3.10, which is also KBW's estimate. Applying the multiple of 12.9 to the 2014 EPS estimate would leave a price target of $40, for potential upside of 27%.
  • Fifth Third Bancorp (FITB) - Get Report of Cincinnati has a first-quarter ROA of 1.34% and a ROTCE of 15.23%. The shares closed at $17.51 Tuesday, trading for 10.1 times the consensus 2014 EPS estimate of $1.73. Applying the multiple of 12.9 to KBW's 2014 EPS estimate of $1.77 would lead to a price target of $23, for upside potential of 31%.

So all four of these banks are trading at lower multiples to consensus forward earnings estimates right now, and three of the four have been much more profitable than KeyCorp. Mutascio's analysis emphasizes just how much of a bargain investors are looking at in shares of U.S. Bancorp and Wells Fargo.

Moving away from higher price-to-earnings multiples, Mutascio considered whether a significant earnings increase was built into KeyCorp's valuation. Like many regional banks, KeyCorp is focused on cutting expenses in order to improve profitability, in a difficult environment for interest spreads and for loan growth.

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.

According to Mutascio, "If we reverse engineer the $12 valuation level by assuming a P/E multiple of 10.1x (our group's current 2014 P/E median of 10.1x), it implies 2014 EPS of $1.19."

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That would make for earnings 31% higher than Mutascio's 2014 estimate, and 24% higher than the consensus estimate. "We would have to shock our EPS model by reducing the company's operating efficiency ratio to 58.3% for the full year 2014 in order to generate EPS of $1.19 -- all else being equal," Mutascio said.

That efficiency ratio would be a very tall order for KeyCorp. Then again, KeyCorp CFO Dan Poston said during the bank's first-quarter earnings call on April 13 that "we expect our efficiency ratio to approach 60% at the end of the year."

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Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.

-- 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 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.