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Here are the Reasons for 18.5% Jump in KeyCorp Stock in a Month
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KeyCorp (KEY - Free Report) , one of the leading regional banks in the United States, has seen its stock soar 18.5% in a month.
This jump is higher than the 11.7% and 6.4% growth of the industry it belongs to and the S&P 500, respectively.
One-Month Price Performance
Image Source: Zacks Investment Research
Let’s figure out the reasons behind KeyCorp’s shares solid performance.
Minority Equity Stake by Scotiabank in KeyCorp
If you observe the above price chart, we will see that KeyCorp shares started rising after the surprise announcement of an almost $2.8 billion equity investment (in aggregate) by Canada’s The Bank of Nova Scotia (BNS - Free Report) on Aug. 12.
BNS signed an agreement to acquire approximately a 14.9% stake (in total) in KeyCorp in two tranches at a fixed price of $17.17 per share. As part of the first tranche, on Aug.30, BNS invested $0.8 billion and now holds approximately 4.9% stake in KEY.
The second part of the deal involves BNS making an additional $2 billion investment. This is expected to close in the first quarter of 2025, pending the Federal Reserve’s consent and satisfaction of customary closing conditions.
Once the capital raise is completed, KEY will evaluate its balance sheet and reposition its available-for-sale (AFS) securities portfolio. The company intends to divest low-yielding, longer-duration AFS securities and invest the proceeds in higher-yielding, more liquid securities.
Though the repositioning will result in a one-time after-tax loss of almost half of the capital raised, it will lead to nearly $400 million in additional net interest income (NII) in 2025 and 2026. It will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
Compelling Financials Benefits
Image Source: KeyCorp
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 almost $710 million to TFC’s 2024 NII.
Rate Cuts to Support KEY’s Net Interest Income
KEY stock touched a new 52-week high of $17.20 on Aug. 23, when the Fed chairman, Jerome Powell, stated, “The time has come for policy to adjust.” He added that the central bank has "ample room" to maneuver as monetary policy enters its next phase without a high recession risk.
This set the stage for the first interest rate cut since March 2020. Existing interest rates are at a 23-year high level of 5.25-5.5%. Hence, this acted as a catalyst for KEY and several other regional banks, including TFC, which has been facing macroeconomic challenges since the beginning of 2023.
While higher interest rates led to substantial growth in NII, the rising funding costs have been straining NII and the net interest margin (NIM). Last year, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
For 2024, KeyCorp expects NII to decline 2-5% because of higher funding costs and subdued loan demand.
The NII guidance may change following a strong indication of rate cuts starting this month. We can expect some positive change in the KEY’s NII target for this year. Clark Khayat, chief financial officer of the company, will present at the Barclays Global Financial Services Conference on Sept. 9, 2024, where he might provide an updated outlook.
Does the KEY Stock Have More Room to Run?
Despite the recent rally in KEY shares, it is currently trading the 12-month trailing price-to-tangible book (P/TB) of 1.65X, below the industry’s 2.13X. This shows the stock is inexpensive currently.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Additionally, technical indicators suggest continued strength for KEY. The stock is trading above its 50-day moving average, signaling robust upward momentum and price stability. This underscores positive market sentiments and confidence in the company's financial health and prospects.
50-Day Moving Average
Image Source: Zacks Investment Research
The minority equity investment by BNS reinforced KeyCorp’s robust financial position. This, along with interest rate cuts and the company’s efforts to strengthen fee income sources, will support top-line growth.
However, near-term challenges, including high funding costs, weak loan demand because of the expected economic slowdown and higher regulatory capital requirements as part of the Basel 3 end-game, cannot be ignored.
Image: Bigstock
Here are the Reasons for 18.5% Jump in KeyCorp Stock in a Month
KeyCorp (KEY - Free Report) , one of the leading regional banks in the United States, has seen its stock soar 18.5% in a month.
This jump is higher than the 11.7% and 6.4% growth of the industry it belongs to and the S&P 500, respectively.
One-Month Price Performance
Image Source: Zacks Investment Research
Let’s figure out the reasons behind KeyCorp’s shares solid performance.
Minority Equity Stake by Scotiabank in KeyCorp
If you observe the above price chart, we will see that KeyCorp shares started rising after the surprise announcement of an almost $2.8 billion equity investment (in aggregate) by Canada’s The Bank of Nova Scotia (BNS - Free Report) on Aug. 12.
BNS signed an agreement to acquire approximately a 14.9% stake (in total) in KeyCorp in two tranches at a fixed price of $17.17 per share. As part of the first tranche, on Aug.30, BNS invested $0.8 billion and now holds approximately 4.9% stake in KEY.
The second part of the deal involves BNS making an additional $2 billion investment. This is expected to close in the first quarter of 2025, pending the Federal Reserve’s consent and satisfaction of customary closing conditions.
Once the capital raise is completed, KEY will evaluate its balance sheet and reposition its available-for-sale (AFS) securities portfolio. The company intends to divest low-yielding, longer-duration AFS securities and invest the proceeds in higher-yielding, more liquid securities.
Though the repositioning will result in a one-time after-tax loss of almost half of the capital raised, it will lead to nearly $400 million in additional net interest income (NII) in 2025 and 2026. It will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
Compelling Financials Benefits
Image Source: KeyCorp
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 almost $710 million to TFC’s 2024 NII.
Rate Cuts to Support KEY’s Net Interest Income
KEY stock touched a new 52-week high of $17.20 on Aug. 23, when the Fed chairman, Jerome Powell, stated, “The time has come for policy to adjust.” He added that the central bank has "ample room" to maneuver as monetary policy enters its next phase without a high recession risk.
This set the stage for the first interest rate cut since March 2020. Existing interest rates are at a 23-year high level of 5.25-5.5%. Hence, this acted as a catalyst for KEY and several other regional banks, including TFC, which has been facing macroeconomic challenges since the beginning of 2023.
While higher interest rates led to substantial growth in NII, the rising funding costs have been straining NII and the net interest margin (NIM). Last year, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
For 2024, KeyCorp expects NII to decline 2-5% because of higher funding costs and subdued loan demand.
The NII guidance may change following a strong indication of rate cuts starting this month. We can expect some positive change in the KEY’s NII target for this year. Clark Khayat, chief financial officer of the company, will present at the Barclays Global Financial Services Conference on Sept. 9, 2024, where he might provide an updated outlook.
Does the KEY Stock Have More Room to Run?
Despite the recent rally in KEY shares, it is currently trading the 12-month trailing price-to-tangible book (P/TB) of 1.65X, below the industry’s 2.13X. This shows the stock is inexpensive currently.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Additionally, technical indicators suggest continued strength for KEY. The stock is trading above its 50-day moving average, signaling robust upward momentum and price stability. This underscores positive market sentiments and confidence in the company's financial health and prospects.
50-Day Moving Average
Image Source: Zacks Investment Research
The minority equity investment by BNS reinforced KeyCorp’s robust financial position. This, along with interest rate cuts and the company’s efforts to strengthen fee income sources, will support top-line growth.
However, near-term challenges, including high funding costs, weak loan demand because of the expected economic slowdown and higher regulatory capital requirements as part of the Basel 3 end-game, cannot be ignored.
Hence, investors should keep an eye on these concerns before taking any investment decision. At present, KEY carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.