KBW Downgrades KEY, Upgrades USB, Sees Potential Interest Rate By Fed

In a report published Wednesday, Keefe, Bruyette & Woods analysts mentioned that there seems to be "some mispricing" with certain banks deemed as asset sensitive and those that are not seen as being poised to benefit significantly from interest hikes by the Fed. The market appears to be "overly euphoric about the potential for interest rate increases by the Fed, overly optimistic about the pace of those potential rate increases," the analysts said, while adding that the consensus EPS estimates have already factored in the positive impact from rate hikes. The analysts downgraded the rating on

to Underperform from Market Perform, while maintaining the price target at $14. KeyCorp's shares are currently trading at a premium to the group's averages as a whole, despite "rather mediocre profitability ratios." In the report Keefe, Bruyette & Woods noted, "We realize the company has a strong capital base, which negatively impacts the ROTCE ratio, but it does not explain the somewhat below-peer ROAA…We continue to believe the company is a risk for greater negative revisions to the consensus EPS estimates. Our 2016 EPS estimate of $1.19 is approximately 5% lower than the consensus estimate of $1.25." Taking into account KeyCorp's current dividend yield of 1.8 percent, the price target assumes a total potential return of -2.7 percent, which represents the lowest return potential from "an otherwise fully valued sector," the analysts added. The analysts upgraded the rating on

to Market Perform from Underperform, while maintaining the price target at $44. The company's shares have underperformed the KBW Bank (BKX) Index by about 4 percent over the last five months. The share price declined 4.1 percent, versus a 0 percent gain for BKX. "While the shares still trade at a premium to the group, the premium has narrowed…Due to the recent underperformance, the shares' total potential return (including a 2.3% dividend yield) of 4.0% is now the mid-point of our large-cap bank coverage universe versus the low end of the range in December 2014," the analysts wrote. Although there is risk of USB missing the 2Q15 EPS estimates, the current share price already reflects this risk, Keefe, Bruyette & Woods noted.