NEW YORK (TheStreet) -- KeyCorp (KEY) is ready to "stop putting out fires," which will enable CEO Beth Mooney to focus on "the key ingredient that could potentially yield more consistent returns for shareholders," says JPMorgan Chase analyst Steven Alexopoulos.
That key ingredient, according to Alexopoulos, is "organic growth."
KeyCorp last month reported that through the third quarter, it had achieved "annualized run rate savings of $207 million, focused on further efficiency improvements." That exceeded the original goal of its cost-cutting program, which was $150 million to $200 million in annualized savings.
The company also reported that its average portfolio loans grew 1% sequentially and 5% year-over-year, with commercial loan growing at a stronger pace of 2% during the third quarter and 11% year-over-year. Please see TheStreet's earnings coverage for more on the company's third-quarter results.
Following a meeting with KeyCorp CFO Donald Kimble, Alexopoulos reiterated his "overweight" rating for KeyCorp while raising his price target for the stock to $15 from $14.00.
"While we appreciate market skepticism over the turnaround potential at Key, in this report we provide a historical deep dive into the company, which suggests that the current version of KeyCorp is the strongest version in 20-plus years," Alexopoulos wrote in a note to clients.
"The horse that is likely to pull the revenue cart is loan and fee revenue growth coming out of the commercial side of Key's business with the retail side being an area to squeeze out additional cost saves," he added. A particular advantage for KeyCorp in growing commercial loans -- coveted by banks for their relatively high fees and generally short maturities -- is its positioning to "capitalize on opportunities provided by Utica Shale exploration," according to the analyst.
In addition to the energy boom, Alexopoulos sees other benefits to KeyCorp's commercial business from industrial and real estate recoveries, as well as "infrastructure improvements to Eastern Ohio."
KeyCorp's return on average tangible common equity (ROE) improved to 12.32% in the third quarter from 9.23% the previous quarter and 9.92% a year earlier, according to Thomson Reuters Bank Insight.
KeyCorp's stock closed at $12.95 Thursday, returning 56% this year. The shares trade for 1.3 times their reported Sept. 30 tangible book value of $9.92, and for 12.7 times the consensus 2014 EPS estimate of $1.02, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $1.12.
Despite the stock's stellar return this year -- outperforming the KBW Bank Index (I:BKX), which was up 29% through Thursday -- KeyCorp still trades at a 27% discount to regional bank peers, based on year-end book value estimates and JPMorgan's 2014 EPS estimates, according to Alexopoulos.
"KEY is on a brief list of relatively inexpensive banks on TBV and EPS, is buying back stock, and pointed in the direction of improved ROEs over time," he wrote.
JPMorgan estimates KeyCorp will see 6% loan growth during 2014, with an 8% increase in operating earnings.
Shares of Cleveland-based KeyCorp were were down slightly in early trading Friday, to $12.90.
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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