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KeyCorp (KEY) Stock Hits 52-Week High on Minority Stake Sale
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Shares of KeyCorp (KEY - Free Report) touched a 52-week high of $17.09 yesterday before closing the session at $15.94 (marking a jump of 9.1%). The surge was driven by the news of an investment of $2.8 billion by The Bank of Nova Scotia (BNS - Free Report) in KeyCorp.
Canada’s BNS will acquire approximately a 14.9% stake in KeyCorp for a fixed price of $17.17 per share, representing a premium of 7.7% at the previous day’s closing price.
For BNS, the step marks a massive advancement as it tries to expand operations in North America.
Deal Terms & Other Details
The deal involves Bank of Nova Scotia buying nearly 163 million KEY shares in two parts. The initial investment of $0.8 billion will result in a 4.9% stake in KeyCorp. Both companies expect to wrap up this initial purchase by the end of this month, subject to the expiration of the antitrust waiting period under the Hart-Scott-Rodino (HSR) Act.
The second part of the deal involves BNS making an additional $2 billion of investment, which is expected to close in the first quarter of 2025, pending the Federal Reserve’s consent and satisfaction of customary closing conditions. Following the second investment, the Bank of Nova Scotia will hold roughly a 14.9% stake in KeyCorp.
BNS will also be able to appoint two directors to KEY's board.
As part of the agreement, KeyCorp and BNS intend to explore potential future partnerships to better serve their respective clients.
KeyCorp Chairman and CEO, Chris Gorman said, “This transaction creates greater capacity for growth by enabling additional investments in targeted scale across our franchise and increases Key's strategic agility as we navigate an uncertain environment from a position of strength.”
Financial Gains
The total $2.8 billion investment is expected to lift KeyCorp’s CET1 capital ratio by 195 basis points to 12.4% and tangible book value per share by 10% as of Jun 30, 2024.
Following the completion of the capital raise, KEY plans to evaluate repositioning its available-for-sale (AFS) securities portfolio by divesting low-yielding, longer-duration AFS securities and investing the proceeds in higher-yielding, more liquid securities.
Though the divestiture of lower-yielding AFS securities will result in a one-time after-tax loss of almost half of the capital raised, it will lead to approximately $400 million in additional net interest income (NII) in 2025 and 2026. This will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
For 2024, KeyCorp estimates NII to decline 2-5% because of higher funding costs and weak loan demand.
This is almost similar to the steps taken by Truist Financial (TFC - Free Report) earlier this year. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add $710 million to TFC’s 2024 NII.
Conclusion
More than a year after the regional banking crisis engulfed the lenders amid rising interest rates, several banks are struggling to sustain profitability.
Hence, KeyCorp aims to accelerate expected profitability, liquidity and capital improvements while enhancing overall financial resilience through a 14.9% stake sale.
Gorman added, “While we continue to be comfortable with our current capital position, we determined that the investment enables Key to accelerate our well-communicated capital and earnings improvement while bolstering our strategic position.”
Image: Bigstock
KeyCorp (KEY) Stock Hits 52-Week High on Minority Stake Sale
Shares of KeyCorp (KEY - Free Report) touched a 52-week high of $17.09 yesterday before closing the session at $15.94 (marking a jump of 9.1%). The surge was driven by the news of an investment of $2.8 billion by The Bank of Nova Scotia (BNS - Free Report) in KeyCorp.
Canada’s BNS will acquire approximately a 14.9% stake in KeyCorp for a fixed price of $17.17 per share, representing a premium of 7.7% at the previous day’s closing price.
For BNS, the step marks a massive advancement as it tries to expand operations in North America.
Deal Terms & Other Details
The deal involves Bank of Nova Scotia buying nearly 163 million KEY shares in two parts. The initial investment of $0.8 billion will result in a 4.9% stake in KeyCorp. Both companies expect to wrap up this initial purchase by the end of this month, subject to the expiration of the antitrust waiting period under the Hart-Scott-Rodino (HSR) Act.
The second part of the deal involves BNS making an additional $2 billion of investment, which is expected to close in the first quarter of 2025, pending the Federal Reserve’s consent and satisfaction of customary closing conditions. Following the second investment, the Bank of Nova Scotia will hold roughly a 14.9% stake in KeyCorp.
BNS will also be able to appoint two directors to KEY's board.
As part of the agreement, KeyCorp and BNS intend to explore potential future partnerships to better serve their respective clients.
KeyCorp Chairman and CEO, Chris Gorman said, “This transaction creates greater capacity for growth by enabling additional investments in targeted scale across our franchise and increases Key's strategic agility as we navigate an uncertain environment from a position of strength.”
Financial Gains
The total $2.8 billion investment is expected to lift KeyCorp’s CET1 capital ratio by 195 basis points to 12.4% and tangible book value per share by 10% as of Jun 30, 2024.
Following the completion of the capital raise, KEY plans to evaluate repositioning its available-for-sale (AFS) securities portfolio by divesting low-yielding, longer-duration AFS securities and investing the proceeds in higher-yielding, more liquid securities.
Though the divestiture of lower-yielding AFS securities will result in a one-time after-tax loss of almost half of the capital raised, it will lead to approximately $400 million in additional net interest income (NII) in 2025 and 2026. This will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
For 2024, KeyCorp estimates NII to decline 2-5% because of higher funding costs and weak loan demand.
This is almost similar to the steps taken by Truist Financial (TFC - Free Report) earlier this year. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add $710 million to TFC’s 2024 NII.
Conclusion
More than a year after the regional banking crisis engulfed the lenders amid rising interest rates, several banks are struggling to sustain profitability.
Hence, KeyCorp aims to accelerate expected profitability, liquidity and capital improvements while enhancing overall financial resilience through a 14.9% stake sale.
Gorman added, “While we continue to be comfortable with our current capital position, we determined that the investment enables Key to accelerate our well-communicated capital and earnings improvement while bolstering our strategic position.”
So far this year, shares of this Zacks Rank #3 (Hold) company have rallied 10.7%, underperforming the industry’s growth of 14.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research