KeyCorp Shares Upgraded To Buy At UBS

UBS upgraded shares of KeyCorp KEY, as the firm thinks skepticism reflected in valuation about the company's ability to generate better returns than peer group financial performance is excessive.

Deal Boost

Analyst Saul Martinez noted that the company continues to deliver on its First Niagara acquisition, with the net present value of cost saves alone accounting for 65 percent of the purchase price. The analyst also thinks the platforms of both the banks are complementary.

Additionally, the analyst sees an incremental $0.12 per share earnings per share upside, if the company delivers on the targeted $300 million in potential fee opportunities over the medium-term horizon.

Outperforming Most Peers

UBS noted the company is generating better profitability than most peers. The firm believes the company can outshine peers in terms of ROEs, ROTCEs and EPS growth, on average, from 2016 to 2019. The firm also expects 14.7 percent ROTCE in 2019, 10 percent higher than in the first half of 2016.

"We expect Key to continue delivering positive operating leverage, and, despite not being seen as a capital return story, the company has capacity to sustain or even increase its payout ratios from the current 80% of earnings in the coming CCAR cycles," the firm added.

As such, UBS believes the company's merger synergies, strong commercial banking platform and elevated payouts to help sustain healthy returns or good earnings and earnings per share growth.

Accordingly, the firm upgraded shares of KeyCorp from Neutral to Buy and lifted the price target from $19 to $22.

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