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) --

Bank of America

(BAC) - Get Report



(C) - Get Report

and other

bank stocks

have soared since March.


(KEY) - Get Report

cheap shares seem like a good opportunity to ride the


rally, but it might be best to avoid them for now.

The Cleveland-based


has raised more than enough capital to weather the weak economy and offers one of the lowest price-to-book values in the industry. Still, KeyCorp's pool of bad loans continues to grow, while its assets keep shrinking.

KeyCorp was one of 10 companies ordered to raise more capital after the government conducted "stress tests" of the nation's 19 biggest banks last spring. The bank has since boosted its tier 1 capital by $2.4 billion, exceeding regulatory mandates.

Still, KeyCorp's stock has lagged behind the 17 other publicly traded banks in the group since the

S&P 500 Financials Index

bottomed on March 6. The index has more than doubled since then, with

Fifth Third Bancorp

(FITB) - Get Report

gaining an amazing 737%. Shares of Bank of America and Citigroup have climbed 467% and 350%, respectively.

KeyCorp's shares have returned just 20% during the period. While that's nothing to sneeze at, it lags holding companies with similar capital levels and loan-quality challenges.

In a widely publicized report on Monday,

Rochdale Securities

analyst Dick Bove said investors should avoid all large regional banks, predicting a pullback for the group. He included KeyCorp in a list of "troubled" banks.

Not surprisingly, KeyCorp shares are among the cheapest of the large holding companies. Its price-to-tangible book ratio was 0.76 as of Friday's close, according to

SNL Financial

. Tangible book value is a company's common equity minus intangible assets, such as goodwill and deferred tax assets.

Of those 18 publicly traded banks, only Citigroup had a lower ratio at 0.56.

State Street

(STT) - Get Report

had the highest ratio, with shares selling at 4.6 times its book value.

However, KeyCorp had $98 million in total assets as of June 30, a 3.5% decline from a year earlier, and has lost money for the past five quarters. The company's nonperforming loans -- those past due by 90 days or more -- totaled $2.9 billion as of June 30, up from $2.3 billion the previous quarter and $1.5 billion a year earlier. The ratio of nonperforming loans to total loans was 4.06%.

The pace of loan losses has also increased to an annualized net charge-off rate of 2.99% as of March. Recent loan losses have been concentrated in the company's commercial loan portfolio, with construction loan charge-offs peaking in the second quarter of 2008. KeyCorp has been winding down several risky lending businesses, placing these loans in its "exit loan portfolio." These categories include loans for houses, boats, recreational vehicles and students.

The company's net interest margin was a weak 2.67% in the second quarter. While an industry average for the second quarter isn't yet available, the average net interest margin for all U.S. commercial banks in the first quarter was 3.25%, according to SNL Financial. Last month, Chief Financial Officer Jeffrey Weeden said on a conference call that he expected the margin to improve during the second half of the year, but there was no silver lining, such as the large increase in

checking account balances

at rival

Regions Financial

(RF) - Get Report


While KeyCorp has enough capital to stay ahead of loan charge-offs, the company hasn't found new revenue streams to give it a competitive advantage in an economic recovery.


(BBT) - Get Report

, for example, picked up more than 300 branches in coveted markets for a song when

Colonial Bank


We rate the company "sell." With net losses likely to continue for several quarters, it's uncertain how quickly KeyCorp will be able to repay the $2.5 billion supplied by the government through the Troubled Assets Relief Program.

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


TheStreet.com Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, 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.