KBW Slashes KeyCorp To Underperform, Cites Premium Valuation Unjustified

In a report published Tuesday, Keefe, Bruyete & Woods analyst Christopher Mutascio downgraded shares of

to Underperform from Market Perform with an unchanged $14 price target as shares are currently trading at a premium despite "mediocre" profitability ratios. Mutascio noted that shares of KeyCorp are currently trading at approximately 13.7x and 12.3x his 2015 and 2016 earnings per share estimates of $1.07 and $1.19, reflecting a premium to the group's averages as a whole (13.1x for 2015 and 11.9x for 2016). The valuation is occurring at a time when the company is showing "mediocre" profitability ratios (first quarter return on average assets) of 1.03 percent versus the peer average of 1.05 percent or 1.10 percent excluding

and

. The analyst also noted that KeyCorp's return on tangible common equity of 10.0 percent also falls short of the peer average of 12.2 percent. Mutascio said KeyCorp is at risk for higher negative revisions to the consensus earnings per share estimate. In fact, the 2016 consensus earnings per share estimate implies a quarterly average earnings per share run rate of over $0.31 – representing a 20 percent increase over the first quarter 2015 level of $0.26. This growth rate is expected despite an inflection in loan loss provision expense due to the end of reserve releases, the waning benefits from previous cost save initiatives, and what appears to be a lull in loan syndications which could negatively impact management's more optimistic view for a rebound in investment banking and debt placement fees," Mutascio wrote. "In our view, these headwinds are likely to provide a partial offset to higher interest rates and the resulting net interest margin expansion – especially if the Fed increases rates at a snail's pace. Thus, we think the earnings per share growth rate implied by the current consensus is overly optimistic and/or assumes much higher short-term interest rates than we believe will play out." A $14 price target is arrived at by applying the company's historically high P/E multiple of approximately 12x to the analyst's 2016 earnings per share estimate of $1.19.