Fee Growth And Capital Strength Will Support A Powerful Long Term Repricing

Catalysts

About KeyCorp

KeyCorp is a US regional financial services company that provides commercial and consumer banking, wealth management and capital markets services.

What are the underlying business or industry changes driving this perspective?

• Continued remixing from low-yielding consumer mortgages into relationship C&I loans, alongside commercial pipelines that are nearly double prior year levels, points to a loan book that could support higher asset yields and net interest income over time. This would typically flow through to earnings.
• Growth in fee businesses such as investment banking, commercial payments, wealth management and commercial mortgage servicing, with record AUM of $68b and strong capital markets activity, provides diversified, relatively low capital intensive revenue streams that can support revenue growth and return on tangible common equity.
• Peer leading capital ratios with CET1 approaching 12% and marked CET1 of 10.3%, combined with planned and potential incremental share repurchases and balance sheet restructurings, create flexibility to optimize the capital base. This can raise earnings per share and returns if deployed effectively.
• Ongoing investment in frontline relationship bankers, advisers and technology, with a planned 10% increase in client facing staff and early signs of production from new hires, is geared toward broadening primary relationships and could support higher fee income, loan growth and operating leverage as revenues outpace expenses.
• Record 2025 revenue trajectory, high single digit growth in fee income compared to 2024, and medium term goals that include a 3.25% or better NIM and 15% or better ROTCE on a run rate basis by the end of 2027, frame a path where incremental NIM expansion, fee compounding and expense discipline together support higher net margins and earnings power.

Assumptions

This narrative explores a more optimistic perspective on KeyCorp compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming KeyCorp's revenue will grow by 14.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 15.7% today to 26.4% in 3 years time.
• The bullish analysts expect earnings to reach $2.3 billion (and earnings per share of $2.35) by about January 2029, up from $932.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.3x on those 2029 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• The bullish analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged shift in the rate cycle or a flatter yield curve than assumed could limit the planned 50 basis point lift in NIM to 3.25% or better, especially if deposit betas end up higher than the low 40s to 50s range management references. This would restrain net interest income and put pressure on earnings.
• The ongoing remix away from low yielding consumer mortgages into relationship C&I and commercial real estate loans increases exposure to sectors like power, utilities, REITs, CLOs and middle market borrowers. Credit stress could reappear over a multi year period, which would raise net charge offs and loan loss provisions and weigh on net margins.
• The medium term plan depends heavily on fee growth in investment banking, commercial mortgage servicing, wealth and payments, yet management itself highlights that middle market M&A volumes have been tepid and expects special servicing fees to move down from near historic highs. Any weaker capital markets activity or lower special servicing balances over time would limit fee revenue growth and slow progress on ROTCE.
• Cost growth is running in the mid single digit range, supported by a 10% increase in frontline staff, higher incentive compensation and technology spend. If revenue growth slows or hiring does not reach full productivity within the 12 to 18 month payback window, the bank could miss its positive operating leverage ambitions and see the efficiency ratio stay elevated, which would cap earnings expansion.
• The plan to support higher ROTCE through excess capital, share repurchases and possible balance sheet restructurings relies on continued regulatory comfort, solid credit and stable funding markets. If regulators or rating agencies take a tougher stance on capital distributions or if market conditions change, KeyCorp may need to retain more capital, which would limit EPS growth and delay improvements in returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for KeyCorp is $32.76, which represents up to two standard deviations above the consensus price target of $23.08. This valuation is based on what can be assumed as the expectations of KeyCorp's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $8.8 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $21.37, the analyst price target of $32.76 is 34.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.