Is It Time to Buy KeyCorp?
Year to date, KeyCorp's stock price has shown blistering growth -- up 59% and torching the S&P 500 in the process. But remember, folks, we're not selling shoes, here; we're making loans, and that can be risky business. So with that in mind, we'd better do some digging.
Today, I'll take a closer look at KeyCorp by comparing it to regional competitors Fifth Third Bancorp and Regions Financial to determine if now is the perfect time to buy. I'll do this by asking three questions:
Is it growing quality deposits?
How are loans performing?
What is the return on assets?
Staying core funded
KeyCorp stated in its 2012 annual fillings that it wants to stay "core funded" -- or loan only with deposits. This is a smart strategy considering that in 2012, the bank was paying 0.6% on interest-bearing deposits, versus 1.7% on bank notes and "other" short-term borrowing.
Since 2010, KeyCorp has decreased its number of interest-bearing deposits, cut down on debt and short-term borrowing, and grown non-interest bearing deposits, in turn increasing its interest rate spread -- or the difference between what it pays to borrow money and what it charges to lend it back out. However, according to KeyCorp's third-quarter fillings, the bank's spread was 2.93%; this is well below the 3.08% and 3.14% for Regions Financial and Fifth Third, respectively.
With that said, I believe KeyCorp has made the necessary strides to clean up its liabilities and strengthen its core deposits. Investors shouldn't be surprised if KeyCorp starts to ramp up its deposits moving into 2014; which would be a strong sign of future growth.
Better performing loans
As Will Rogers famously said, "I'm not so much concerned with the return on capital as with the return of capital." With that great advice in mind, we need to make sure our banks loans are performing. One simple way to determine this is to check the net charge-offs to average loans.
Third Quarter 2013
Fifth Third Bancorp
Source: Company filings.
Things got pretty messy from 2008 to 2010, but KeyCorp has shown outstanding progress in chipping its ratio down to 0.7% in 2012, and 0.3% in 2013 -- according to the company's most recent 10-Q. KeyCorp has set its target ratio at 0.4% to 0.6%, leading this investor to believe that KeyCorp can get more aggressive with its loans in 2014 -- this would be yet another great sign of potential growth.
Strength of management
At the end of the day, management is judged on how much profit it's able to squeeze out of the company's assets; this is otherwise known as return on assets, or ROA. KeyCorp certainly has room for improvement with a third-quarter ROA of 0.95%. The bank is trailing Fifth Third Bancorp and Regions Financial's 1.5% and 0.98%, respectively.
KeyCorp, as stated in the bank's 2012 fillings, believes that by leveraging technology, changing to a more variable cost base -- for example, outsourcing noncore functions -- and continuing to improve funding with low cost deposits, the company will be able to cut costs and improve ratios. How much progress management is able to make, and in what time frame, will be a fair indicator of management's effectiveness. As for this investor, I'm betting on KeyCorp's CEO Beth Mooney to crack the whip and follow through.
Is now the time to buy?
KeyCorp's not a secret anymore, and the stock price is reflecting that. However, as Warren Buffett has said, "It's far better to buy a wonderful company at a fair price, then to buy a fair company at a wonderful price."
With that said, I believe KeyCorp is well on its way to becoming a wonderful company, and as long as the bank continues to make strides toward its long-term targets, it looks like a strong play, and a quality addition to any portfolio.
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Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool owns shares of Fifth Third Bancorp and KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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