KeyCorp Mgmt Turning More Positive On First Niagara Deal, But Deutsche Bank Remains Concerned

The brokerage noted that the company reiterated the deal to add at least 5 percent to EPS in 2018, will increase ROTCE by 200bps and improve the efficiency ratio by 300bps.

"The biggest change in our view since deal announcement is a better appreciation in the important of scale (which FNFG helps). This reflects lower for longer interest rates, a weaker economy and continued expense pressure for the overall industry related to regulatory and tech/IT/cyber costs," analyst Matt O'Connor wrote in a note.

Related Link: KeyCorp Pays About 30% Profit As Dividend

The analyst highlighted that a 50bp drop in five-year rates since the deal was announced likely to impact First Niagara earnings due to lower securities yield.

"On a consolidated KEY basis, mgmt estimates that every 25bp decline in long-term rates will hit combined NIM by ~ 2bps. If rates stay here, we believe this implies closer to a 4bp hit to combined NIM," O'Connor elaborated.

O'Connor continued that each 1bp of NIM (net interest margin) decline reduces combined EPS by $0.01 (or slightly less than 1 percent). The analyst expects 2016 EPS of $1.07.

Meanwhile, the analyst maintained his Hold rating as he remains concerned that the earnings boost from the deal may be less than expected due to execution risk, weaker net interest income and potential run off of some First Niagara's commercial loans.

"We also worry there may be higher than currently planned for upfront costs to drive revenue synergies (specifically related to mortgage and insurance). That said, these risks seem at least somewhat reflected in KEY's current valuation," O'Connor added.

At the time of writing, shares of KeyCorp were down 0.90 percent to $11.56, while the analyst has a price target of $13.