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."
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." KEY data by YCharts Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn