KeyCorp: Buyback Anticipation Winner

NEW YORK ( TheStreet) -- KeyCorp ( KEY) of Cleveland was the winner among the largest U.S. banks on Wednesday, with shares rising 1.5% to close at $10.01.

The broad indices all rose slightly after the Census Bureau released its advance estimate that retail sales during February rose 1.1% from the previous month and 4.6% from a year earlier. The sales figures were not adjusted for price increases. Economists on average expected retail sales in February to increase just 0.5% from the previous month, according to Zacks.

Excluding vehicle sales, retail sales in February were up 1.0% from January, ahead of the consensus estimate of an increase of 0.5%.

There were various factors weighing on retail sales, including the end of the temporary 2% cut in the Social Security payroll tax in January, with many workers not being affected until their first 2013 paychecks rolled in on Jan. 15. Deutsche Bank economist Joseph LaVorgna earlier on Wednesday his firm was "projecting slightly below consensus numbers for February retail sales because we believe that a delay in tax refunds could temporarily depress spending," underlining another reason why the Census Bureau's report was a positive surprise.

The KBW Bank Index ( I:BKX) rose slightly to close at 56.93, with all but two of the index components showing gains for the session.

Thursday Is Capital Return Day

The Federal Reserve on Thursday at 4:30 p.m. EST, will announce the results of the Comprehensive Capital Analysis and Review of the banks' capital plans through the first quarter of 2014. At roughly the same time, most of the nation's large banks are expected to announce plans to return capital to investors through dividend increases or share buybacks.

Returning capital to investors is the order of the day for banks, with soft loan demand in most areas except for commercial and industrial lending, "which is looking pretty frothy," says Tom Day, a senior director at Moody's Analytics.

Since bank's "don't have asset allocation choices" in the low rate environment, Day says "the choice you have is to give money back to shareholders or look for acquisitions." But for banks looking for deals, "the multiples are not exactly where they want them, because Bernanke has done a great job destroying deposit premiums completely," he says.

"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) of Birmingham, Ala., and Comerica ( CMA) 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.

>Contact by Email.


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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