Why KBW Just Upgraded KeyCorp

In a report published Wednesday, Keefe, Bruyette & Woods analyst Christopher Mutascio upgraded the rating on

from Underperform to Market Perform, citing valuation. The price target was reiterated at $15.50. KeyCorp's shares have been flat over the past three months, while the BKX has risen by 5 percent. The shares underperformed even while it was "a trader's market for bank stocks," analyst Christopher Mutascio said. Earlier in 2015, the company had been downgraded to Underperform on account of the premium P/E multiple and mediocre profitability in both ROA and ROTCE terms. "While the company's profitability measures are still mediocre, in our view, the shares no longer trade at a premium valuation and now trade spot in line with our coverage universe averages of 12.3x our 2016 EPS estimate and 11.0x our 2017 EPS estimate," Mutascio wrote. The estimated total potential return for KeyCorp's shares is at 7 percent now, which is "more in line with the average for our large regional banks" of 9 percent. Although the company reported its 2Q15 EPS at $0.27, marginally short of the consensus expectation of $0.28, the figure was ahead of the KBW estimate of $0.26. "This provides us with greater confidence in our 2016 and 2017 EPS estimates," Mutascio mentioned.