Holdco Asset Management: Keycorp Board Should Terminate Ceo Christopher Gorman's Employment

KeyCorp trades at $19.06 and has moved in lockstep with the market. Its shares have returned 19.8% over the last six months while the S&P 500 has gained 15.3%.

Is now the time to buy KeyCorp, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is KeyCorp Not Exciting?

We're cautious about KeyCorp. Here are three reasons you should be careful with KEY and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities.

Unfortunately, KeyCorp struggled to consistently increase demand as its $6.34 billion of revenue for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a lower quality business.

2. Net Interest Income Points to Soft Demand

Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.

KeyCorp’s net interest income has grown at a 2.5% annualized rate over the last five years, much worse than the broader banking industry. This was driven by its loan growth as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, declined throughout that period.

3. Low Net Interest Margin Reveals Weak Loan Book Profitability

Net interest margin (NIM) serves as a critical gauge of a bank's fundamental profitability by showing the spread between interest income and interest expenses. It's essential for understanding whether a firm can sustainably generate returns from its lending operations.

Over the past two years, we can see that KeyCorp’s net interest margin averaged a poor 2.4%, indicating the company has weak loan book economics.

Final Judgment

KeyCorp’s business quality ultimately falls short of our standards. That said, the stock currently trades at 1.2× forward P/B (or $19.06 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.