Here's a quick look at the lower forward price-to-earnings valuations for four big banks that beat KeyCorp's first-quarter return on average assets (ROA) of 0.99:
- Wells Fargo's (WFC) first-quarter ROA was 1.41% and its return on average tangible common equity, or ROTCE, was 17.76%. The shares closed at $40.55 Friday, trading for 10.4 times the consensus 2014 EPS estimate of $3.90.
- U.S. Bancorp (USB) of Minneapolis achieved a first-quarter ROA was 1.65% and its ROTCE was a very strong 23.79%. The company has been the best earnings performer among the 24 components of the KBW Bank Index through and after the credit crisis. The shares closed at $35.06 Friday, trading for 10.8 times the consensus 2014 EPS estimate of $3.24.
- For BB&T (BBT) of Winston-Salem, N.C., the first-quarter ROA was 1.11% and the ROTCE was 8.25%. The shares closed at $32.92 Friday, trading for 10.6 times the consensus 2014 EPS estimate of $3.10.
- Fifth Third Bancorp (FITB) of Cincinnati had a first-quarter ROA of 1.34% and ROTCE of 15.23%. The shares closed at $18.20 Friday, trading for 10.5 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%.
If short-term rates remain in their current range, which is quite possible even if the Fed limits its bond-buying and long-term rates rise more, short-term rates may remain in their current range for quite some time. This will benefit KeyCorp. "From 2Q13 to 2014, $6.3B of CDs are maturing with an average rate of 1.40%, and $1.1B with average rates of 2.60% are maturing in 2015 and beyond," McEvoy wrote. And if long-term and short-term rates rise together, KeyCorp should still benefit, as the company describes itself as "moderately asset sensitive," meaning its assets will reprice upward faster than its liabilities. Another major advantage for KeyCorp and its shareholders is a strong capital base, which can feed expansion in more profitable business lines, or can be used to repurchase shares, those lowering the share count and boosting EPS. KeyCorp's March 31 Tier 1 common equity ratio was 11.4%, according to McEvoy, which was considerably higher than the 10.0% average for 12 large regional banks covered by his firm.
KeyCorp has a program in place to repurchase up to $426 million in common stock through the first quarter of 2014. The company pays a quarterly dividend of 6 cents on common shares, for a yield of 2.04%, based on Friday's close. Most large-cap banks are focused on cutting expenses, and KeyCorp is no exception, with the goal of its "Keyvolution" program to reduce the bank's efficiency ratio to a range of 60% to 65%. 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.
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