Strategic Shifts And Market Expansion Positively Impacting Bank's Profitability And Growth

Key Takeaways

• Shift from net interest income headwinds to tailwinds and strategic deposit cost management expected to enhance revenue growth and profitability.
  
• Expansion in wealth management and commercial payments, alongside strong growth in commercial loan servicing, poised to drive noninterest income and earnings stability.
  
• Deteriorating asset quality, regulatory pressures, and challenges in loan demand and investment banking sectors indicate potential profitability and growth issues for KeyCorp.

Catalysts

Operates as the holding company for KeyBank National Association that provides various retail and commercial banking products and services in the United States.

• The anticipated shift from net interest income (NII) headwinds to tailwinds due to a pivot in fixed asset repricing and the structure of swap and treasury maturities, expected to significantly enhance NII in the forthcoming quarters, impacting revenue growth positively.
  
• Improved deposit costs dynamics, with a more stable increase in deposit costs and a strategic focus on high-value consumer and commercial deposits, aiming to fortify net interest margins and overall profitability.
  
• Expansion in the wealth management and commercial payments sectors, marked by record production volumes and significant client growth, poised to drive noninterest income upwards, influencing both revenue and net margins positively.
  
• Strong growth in the national third-party commercial loan servicing business, providing a counter-cyclical revenue stream and insights into the commercial real estate market, which could bolster diversified revenue streams and enhance earnings stability.
  
• Persistent discipline in pricing and cost control amidst the evolving economic and interest rate landscape to maintain and potentially improve net margins, thereby supporting earnings growth even in a tepid loan demand environment.

Assumptions

• Analysts are assuming KeyCorp's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.5% today to 28.3% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $1.8) by about October 2027, up from $716.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2027 earnings, down from 21.1x today. This future PE is lower than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• The decline in earnings per share from the previous year and an increase in nonperforming loans could indicate potential issues with asset quality and profitability.
  
• Lower than expected loan demand and competitive pricing environment could lead to lower interest income and pressure on net interest margins.
  
• The preliminary stress capital buffer increase suggested by the Fed's stress test results could imply higher capital requirements, potentially impacting the company's ability to distribute capital to shareholders or invest in growth opportunities.
  
• Tepid loan demand and the impact of higher funding costs could pressure net interest income, despite growth in deposits and controlled expenses.
  
• Risks associated with investment banking and commercial real estate markets could affect noninterest income and loan quality, impacting earnings and capital ratios.

Valuation

• The analysts have a consensus price target of $19.59 for KeyCorp based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.6 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of $16.24, the analyst's price target of $19.59 is 17.1% 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.