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NYSE: Key $13.70
KeyCorp
Rating: Buy
Diversified Financial Services
Price Target: $17.42
July 19, 2014
Market Data
Market Cap
Price to Book
Price to Earnings
EPS
*as of
52 Week High
52 Week Low
3 month avg. daily volume
Total Assets
ROE
ROA
Shares outstanding
Dividend Yield
Institutional Ownership
Royce West, Manager
614-227-2975
$12.01B
1.17
west.47@osu.edu
13.35
Mike Ranttila, Analyst
$1.03
614-477-7963
7/19/14
ranttila.4@osu.edu
$14.70
SIM Analyst Consensus SIM Analyst Consensus
8.3M
$90.8M
Revenue
EPS
$11.05
2014E
1.16
1.06
$4.23B
$4.12B
2015E
1.20
1.15
$4.34B
$4.28B
9.24%
1.05%
876.8M
1.80%
84%
KEY 1 Year History
Investment Thesis
I recommend a BUY rating for KeyCorp with a price target
of $17.42. This target price implies a discount of 27.2%
versus the current market price. When rising interest rates
become priced in over the next 12 months, the price target
will be magnified, making KEY and even bigger bargain at
the current price.
Catalysts and Opportunities
Regional expansion
Optimization of capital via strategic branch closure
Commercial loan growth
Diminishing need for loan loss provisions
Asset-sensitive balance sheet
KeyCorp is a bank holding company headquartered
in Cleveland, Ohio with consolidated total assets of
approximately $92.9 billion. KeyCorp is the parent
holding company for KeyBank. They provide a wide
range of retail and commercial banking, commercial
leasing, investment management, consumer finance,
commercial mortgage servicing and special
servicing, and investment banking products and
services to individual, corporate, and institutional
clients through two major business segments: Key
Community Bank and Key Corporate Bank.
Risks
Decline in interest rates
Regulatory burdens
Inability to enhance the efficiency ratio
Macro economic slowdown
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Table of Contents
Company Overview .................................................................................................3
Company Analysis...................................................................................................3
Segment Analysis....................................................................................................5
Competitive Advantages and Sustainability ............................................................8
Recent News and Important Events ........................................................................10
Economic Factors....................................................................................................10
Projected Income Statement Discussion .................................................................12
Predictions vs. Consensus ......................................................................................12
Peer Comparison ....................................................................................................13
Discounted Cash Flow Analysis ..............................................................................13
DCF Sensitivity Analysis .........................................................................................14
Valuation Analysis ...................................................................................................15
Multiple Valuation- Absolute .........................................................................15
Multiple Valuation- Comparisons ..................................................................15
Conclusion ..............................................................................................................16
Appendices
Appendix I – Projected Income Statement
Appendix II – Discounted Cash Flow Analysis
Appendix III – Sources
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Company Overview
KeyCorp is a bank holding company which provides myriad retail and commercial banking, commercial
leasing, investment management, consumer finance and investment banking products and services to
individual, corporate and institutional clients. It functions largely through two business segments: Key
Community Bank and Key Corporate Bank. Key Community Bank serves individuals and small to mid-sized
businesses by offering deposit, investment, lending, and wealth management products and services. Key
Corporate Bank includes three business lines: Real Estate Capital & Corporate Banking Services,
Equipment Finance, and Institutional & Capital Markets. Real Estate Capital provides financial services for
public and private owners, investors and developers of non-owner-occupied commercial real estate
properties. This unit sells and services loans using Fannie Mae, Freddie Mac, and FHA. Corporate Banking
provides cash management, interest rate derivatives, and foreign exchange products and services. It also
provides a full array of commercial banking products and services to government and not-for-profit entities
and to community banks through its Public Sector and Financial Institutions businesses. Capital Markets
offers commercial lending, treasury management, investment banking, derivatives, foreign exchange,
equity and debt underwriting and trading, and syndicated finance products and services, primarily to
emerging and middle-market companies in the Industrial, Consumer, and Real Estate, Energy, Technology
and Healthcare sectors. The company, established in 1958, is headquartered in Cleveland, OH.
Company Analysis
2013
Highlights
 Revenue increased 5% from 2012
 Mortgage Servicing rights more than doubled
 More than $241 million in annualized savings
and the efficiency ratio was reduced to 65%
from 69%
 The payout ratio was 20%
Q2 2014
 Average loans up 5.5%
 Average deposits up 2.5%
 Net interest income down $7 million,
 Noninterest income up $26 million
 Noninterest expense down $22 million
Catalyst
 The Commercial, Financial, and Agriculture
(“C,F,&A”) loan portfolio experienced an
increase of 12%, year over year
 Acquisition of servicing portfolio
 realized due to strategic staff and branch
reductions
 The dividend was increased, and share
repurchases reach $474 million.
 The C,F,&A loan portfolio experienced an
increase of 12.6%, year over year
 Commercial mortgage servicing acquisitions
and growth in commercial deposits
offsetting declines in higher cost CDs
 Primarily due to lower asset yields and lower
loan fees caused by an early termination of a
leveraged lease
 Investment banking and debt placement fee
growth, higher principal investing gains, and
an increase in operating lease income
 $13 million in lower efficiency-related
charges
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 Improved asset quality
 Disciplined capital management
 Net loan charge-offs to average loans
declined from .34% to .22%
 Repurchased $108 million of common shares
Outlook
KeyCorp is positioned to attain growth in this somewhat burgeoning economy. While it has experienced a
decline in 1-4 family mortgage business resulting from the prolonged low rate environment, it has gained
traction in the commercial loan space. This noteworthy growth should be more than enough to bolster
earnings over the coming years.
Net interest margin was compressed during the last cycle, leading to less income from the company’s
primary business model. As the yield curve shifts, however, KeyCorp will benefit as a result of its properly
allocated balance sheet. This will serve to strengthen earnings in the upcoming year.
While loan yields have been driven down by economic events, the cost of funds has also plummeted. This
has allowed banks, such as Key, to protect its margin by limiting noninterest expense. The following graph,
taken from the 2014 Q2 earnings call presentation, shows the decline in interest-bearing liabilities over the
past 2 years:
Asset quality is a unique identifier for the overall health of a lending institution. It continues to be a
tremendous concern for examiners and Key has seen impressive results in curtailing the aftereffects of the
economic meltdown. Net charge offs are at their lowest level since the first quarter of 2007. Loans
delinquent between 30-89 days have declined from 80 bps at the end of 2012 to 49 basis bps in 2014 Q2.
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Segment Analysis- Key Community Bank
Key Community Bank serves individuals and small to mid-sized businesses by offering deposit, investment,
lending, credit card, and personalized wealth management products and business advisory services. These
products and services are provided through relationship managers and specialists working in a 12-state
branch network.
2013
Q2 2014
Highlights
 Recorded net income of $151 million for
2013, compared to $129 million for 2012,
and $191 million for 2011.
 Average loan balances up 3.0% from prior
year
 Average core deposits up 3.6% from prior
year
 Net income up 5.8% from the prior year
Catalyst
 The increase in 2013 was primarily due to
Key’s efficiency initiative.
 Increase in C,F,&A loans
 Increase in lower cost funds
 43.9% decrease in the provision for loan
losses
Segment Analysis- Key Corporate Bank
Key Corporate Bank is a full-service corporate and investment entity concentrated on fulfilling the needs of
middle market customers in the following industries: consumer, energy, healthcare, industrial, public sector
and real estate. Key Corporate Bank provides an extensive collection of banking and capital markets
products to its clients, including syndicated finance, debt and equity capital markets, commercial payments,
equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and
public finance.
As announced in the 2014 Q2 earnings call, Key is to acquire Pacific Crest Securities to support the
expansion of Corporate Bank. This cash deal is expected to close in the third quarter of 2014. Pacific Crest
Securities is a leading technology platform and will provide an opportunity to expand new and existing client
relationships. The acquisition underscores Key’s commitment to strengthen corporate and investment
banking serving middle market companies.
2013
Q2 2014
Highlights
 Key Corporate Bank recorded net income of
$444 million for 2013, compared to $409
million for 2012, and $554 million for 2011.
 Average loan balances up 14.5% from the
prior year
 Average deposits up 3.3% from the prior
year
Catalyst
 The 2013 increase was driven by an increase
in noninterest income and a decrease in the
provision for loan and lease losses, partially
offset by a decrease in taxable-equivalent net
interest income and an increase in
noninterest expense.
 Increase in C,F,&A and commercial real estate
loans
 Increase in public sector deposits
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 Investment banking and debt placement
fees increased 18.3% from the prior year
 Continued increase in income-generating
activity
Other Segments
Other Segments consists of Corporate Treasury and various other portfolios. Other Segments generated
net income of $314 million for 2013, compared to $256 million for 2012. For the second quarter of 2014,
other Segments generated net income of $72 million compared to $49 million for the same period last year.
Segment Performance
The Community Bank provides the majority of overall revenue at about 53% versus the Corporate Bank’s
share of 37%. The following graph exemplifies this relationship:
Segment Revenue as % of Total Revenue
60%
50%
40%
30%
20%
10%
0%
2011
2012
Community
Corporate
2013
Other
As we delve deeper into the financials, we recognize a glaring difference in the operational output of the
segments. Key Commercial, the clear driver of revenue, is only responsible for 17% of net income.
Corporate Bank, however, drives nearly half of the net income. The following shows a graphic depiction of
these differences:
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Segment Net Income as % of Total Net Income
70%
60%
50%
40%
30%
20%
10%
0%
2011
2012
Community
Corporate
2013
Other
The source of the tremendous disconnect between revenue and net income lies in noninterest expense. In
2013, the Bank experienced $241 million in savings related to branch closing and staff reductions. It also
decreased the efficiency ratio by 4% to 65%. Corporate Bank requires significantly less operating expense
to generate profit, as portrayed in the following graph:
Noninterest Exp as % of Total Noninterest Exp
70%
60%
50%
40%
30%
20%
10%
0%
2011
2012
Community
Corporate
2013
Other
Key’s strategy comprises the approach of decreasing Community Bank’s efficiency ratio by optimizing the
branch network and redeploying capital as well as the plan to increase the flow of business through
Corporate Bank.
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Competitive Advantages and Sustainability
Market
The market in which KeyCorp operates is highly competitive. Key competes with other financial institutions,
such as commercial banks, savings associations, credit unions, mortgage banking companies, finance
companies, mutual funds, insurance companies, investment management firms, investment banking firms,
broker-dealers, and other local, regional, and national institutions that offer financial services. Smaller
competitors have fewer regulatory constraints and/or lower cost configurations. The industry is expected to
become additionally competitive as technological enhancements make it easier to provide these services.
These augmentations could reduce the significance of financial institutions. Key provides quality products
and services at competitive prices, and offers those they believe enable them to keep pace with customer
preferences and industry standards.
Merger and acquisition activity has recently generated greater concentration in the industry, placing
additional stress on Key’s core products and services. Key will continue to monitor the landscape in an
effort to identify any potential acquisition, though it doesn’t appear to be a target.
Industry Assessment
Banking is a mature industry providing monetary safety and marketplace. Customers use banks in many
different manners. Lending customers operate in a highly competitive market, with many banks vying for
the best credits available. A significant portion of the 1-4 family segment is commoditized via Government
Sponsored Enterprise activity. Federal Reserve rates also act as a commodity on the broader industry.
Small depositors hold little sway while large CD depositors are almost welcome to leave due to the high
cost of funds. Banks consistently review deposit and loan rates versus the competition. Currently, most
new loans are “stolen” from other banks, while this trend appears to be diminishing. Customer switching
costs are nearly non-existent.
The threat of new entrants is minimal today due to intense regulatory environment and high capital
thresholds. For example, no new banks created in 2011.
Quantitative Easing
The Federal Reserve (“Fed”) Balance Sheet has ballooned to nearly $5 trillion dollars. Though the Fed has
signaled the forthcoming end to monthly purchases, it’s still left with a significant allotment of assets to
unwind. These actions could have consequences on investment pricing on banks’ books. Chairman Janet
Yellen has been clear that this is not a current priority and therefore should not impact stock valuations in
the near term.
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Interest Rate Sensitivity
Banks’ incomes are susceptible to swings due to changes in interest rates. The slope of the yield curve is
closely monitored by the industry and can be measured by the spread between the two year and ten year
Treasury Notes. Since banks typically lend long and fund short, a higher spread creates higher net interest
margin, thus affecting the bottom line. The following graph shows the cyclical nature of the slope and
bolsters our belief that the spread will continue to edge closer to 3.00%, thereby increasing company
valuation.
Yield Spread 2Yr T-Note v 10Yr T-Note
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
-0.50
-1.00
Interest rate risk simulation analysis measures the net interest income at risk by simulating the change in
net interest income that would occur if rates gradually increase or decrease over the next twelve months.
The calculated amount of net interest income at risk is compared to the amount in an unchanged rate
landscape. In a +200 basis point interest rate ramp scenario, the bank is expected to experience a 3.00%
increase in net interest income.
Further bolstering KeyCorp’s balance sheet position is the weighted average duration of the investment
portfolio. At June 30, 2014, the portfolio duration was 3.6 years, which negates exposure of securities
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maturing further out on the yield curve. As rates rise, securities will be able to reprice much faster due to
the short duration.
Management Team
The management team is a qualified and experienced group, capable of growing the bank in a prudent
manner. Ms. Beth Mooney has been KeyCorp’s Chairman and Chief Executive Officer since May 1, 2011.
She has over 30 years of financial services experience in retail banking, commercial lending, and real estate
financing with KeyCorp and other banks.
Mr. Christopher Gorman has been the President of Key Corporate Bank since 2010. He previously served
as a KeyCorp Senior Executive Vice President and head of Key National Banking during 2010. Mr. Gorman
was an Executive Vice President of KeyCorp and was also President of KeyBanc Capital Markets.
Mr. Donald Kimble has been the Chief Financial Officer of KeyCorp since June 2013. Prior to joining
KeyCorp, he served as CFO as well as Controller of Huntington Bancshares Inc.
Mr. William Koehler has been the President of Key Community Bank since 2010. Mr. Koehler served as
Great Lakes Regional President, leader of KeyCorp’s Keyvolution initiative, Managing Director, and
Segment Leader of the Financial Sponsors Group and Regional Banking within KeyBanc Capital Markets.
Recent News and Important Events

July 10, 2014 David K. Wilson elected to KeyCorp Board of Directors

May 13, 2014 Declares dividend of $0.065, an 18% increase

April 9, 2014 Announces new leadership structure for Key Community Bank

January 17. 2014 Demos Parneros elected to KeyCorp Board of Directors

October 8, 2013 Brian Hunnicutt named managing director in the debt capital markets and
corporate syndications group
Economic Factors
From a macro perspective, we envision the banking sector to regain the ground it lost to the broader market
since the occurrence of The Great Recession. This reversion to mean implies a return to pre-crisis levels
for banks in general, and KeyCorp is well-positioned to surpass these expectations.
Though assessing the precise timing of rate moves is imprudent, we are very comfortable in predicting an
eventual increase in rates. This forecast is incontrovertible, since rates are at historic lows and have but
one way to significantly move.
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In the first quarter of 2014, the U.S. economy contracted 2.9%. This decline is greater than the entire 2001
recession, including an enigmatically frail start to the year for consumers. Nevertheless, the economy
seems to be rallying in recent months, bolstered by a buoyancy in housing statistics and continued
strengthening in the job data. Based on this analysis, it’s likely the Fed will raise its overnight rate in the
first half of 2015. As we near that elevation, the market is likely to price in the benefits of a properly managed
asset-sensitive balance sheet prior to the actual rate shift.
Regulatory Burdens
The Dodd-Frank Act, along with myriad other financial reform initiatives, place considerable cost burdens
on banks. These reforms are intended to protect deposits and the banking industry, but aren’t concerned
with shareholders. KeyCorp has met these demands and is well positioned for continued regulatory
changes.
Interest Rates
Cash flows of banks are largely driven by the difference between costs of deposits and yields on loans and
investments. Because these relationships are contractual obligations, the mismatch of asset and liability
duration creates an inherent risk to fluctuating interest rates. KeyCorp has positioned its balance sheet to
grow in a rising rate environment.
Financial Sector
The financial sector has lagged the S&P 500 index for several years. The aftermath of The Great Recession
created considerable turmoil in the industry. This led to significant impact to both balance sheets and
income statements as banks shifted to healthier credits why allowing for greater losses in the future. The
end of this period is impending and KeyCorp is adequately positioned to create value for shareholders. We
fully expect a reversion to the mean relative to S&P valuation. The following graph shows the valuation
gap between the S&P 500 Financials Index and the broader index that we expect to close over the next 12
months:
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Projected Income Statement Discussion
Balance Sheet and Income Statement Assumptions
The income statement forecast evolved using a top-down approach. The trend in the macro economic
landscape portends favorable outcomes for financial institutions.
As unemployment normalizes and
housing rebounds, the financial sector should continue to benefit. These assessments, coupled with the
financial data found in KeyCorp’s filings and calls, led to estimated loan growth of 3.5% for both 2014 and
2014 and 3.0% for 2016. These estimates are conservative and fall below the most recent levels of growth.
Deposit growth estimates for 2014, 2015, and 2016 are 3.0%, 2.5%, and 2.0%, respectively. Anticipated
declines in allowance for loan and lease losses for the same years are 1.0%, 2.0%, and 2.5% respectively.
The balance sheet disposition drives the income statement, therefore leading to increases in Community
Bank net interest income for 2014, 2015, and 2016 of 3.5%, 3.5%, and 3.0%, respectively. Continuing with
a conservative approach, Corporate Bank’s 2014, 2015, and 2016 net interest income estimates are 2.0%
each.
We also performed an analysis based on a rising interest rate atmosphere. Balance sheet assumptions
were unchanged between the two models. While rising rates do indeed impede 1- 4 family loan growth,
most of that activity has already been suppressed and is exemplified in the current balance sheet.
In an up 200bps rate environment, increases in Community Bank net interest income for 2014, 2015, and
2016 of 6.5%, 6.5%, and 6.0%, respectively. Corporate Bank’s 2014, 2015, and 2016 net interest income
estimates are 5.0% each. These estimates are increases of 3.0% based on KeyCorp’s assessment of its
net interest income in such a rate environment.
SIM Analyst Predictions vs. Consensus
Consensus diluted EPS grows from 1.06 in 2014 to 1.33 in 2016. Our model indicates more growth early
in the range with tapering near the end. We predict diluted EPS to be 1.16 for the four quarters ending
June 30, 2015 growing to 1.24 in 2016. The 2014 discrepancy partially relates to a timing mismatch in our
model due to analyzing complete years rather than quarters. Our sales estimates for 2014 are $4.2 million
versus consensus $4.1. Consensus shows a much more aggressive sales growth pattern through 2016 of
11% versus our 5% growth over the same period. This typifies our conservative modelling approach.
Finally, 26 analysts place a mean target price of $15.15 (with a high of $17.00), vs. our $17.42 valuation.
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Peer Comparison
Tier 1 Capital (Basel III)
efficiency ratios
P/B
ROA
ROE
net charge off
ALLL/Loans
Trailing P/E
Div yield
Current Price
Mean Analyst Target
Forward P/E
Expected EPS (2015)
Calculated Price
Exp $ Diff
Exp % Diff
WFC
10.09
57.90
1.70
1.55
13.58
0.35
1.76
12.81
2.60
51.49
53.44
12.00
4.31
55.21
3.72
COF
12.23
55.91
1.10
1.48
10.42
2.04
2.19
11.75
1.40
83.96
86.04
11.24
7.44
87.42
3.46
C
10.60
63.00
0.80
0.72
6.73
1.57
2.95
10.81
0.10
47.00
58.25
8.80
5.37
58.05
11.05
JPM
10.70
73.00
1.10
0.69
7.81
0.81
2.25
13.83
2.80
55.80
64.64
9.46
5.96
82.43
26.63
Key
10.70
65.00
1.20
1.01
8.71
0.22
1.56
13.81
1.80
13.70
14.98
12.43
1.14
15.74
2.04
7.2%
4.1%
23.5%
47.7%
14.9%
STI
9.70
64.90
1.00
0.80
6.58
0.35
1.58
15.88
2.00
39.85
42.87
12.19
3.29
52.25
12.40
31.1%
The preceding chart shows KeyCorp to be a well-capitalized institution. Its biggest weakness is the
efficiency ratio, which means they’re spending too much on each dollar of earnings. We believe the strength
of management will unlock hidden value by continuing to focus on decreasing this ratio. The net charge off
figure indicates diligence in cleaning up the post-recession balance sheet. The ALLL/loans ratio will
continue a downward trend to an eventual 1.25-1.35 range. This movement will expose previously hidden
gains from the balance sheet.
We calculated a price per share using expected EPS and the P/E ratio. We compared it to the mean analyst
target to verify reasonableness. Only JP Morgan fell outside of our expected range. This approach, as
anticipated, unveils value in the financial sector as a whole.
Discounted Cash Flow Analysis
Overview
The base case analysis implies KeyCorp intrinsic share equity to be $17.42. At July 19, 2014, the market
price per share was $13.70, revealing a 27.2% undervaluation. A terminal discount rate of 10.0% was used
along with a terminal free cash flow growth percentage of 3.0%. Net income was used as the free cash
flows to be discounted.
The interest rate growth case analysis implies KeyCorp intrinsic share equity to be $19.90. At July 19,
2014, the market price per share was $13.70, revealing a 45.3% undervaluation. The discount and terminal
rates were unchanged from the case model.
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Terminal Discount Rate
The discount rate of 10.0% was used to signify the stable, mature banking industry as it exits a tumultuous
period. This rate is commensurate to that expected by shareholders as a return on their capital. This rate
also reflects the strengths of KeyCorp in the near future.
Terminal Growth Rate
The terminal growth rate of 3.0% was a reflection of the overall conservative approach to this analysis.
While we expect the terminal growth rate over the next decade to surpass that which we’ve elected, the
risks pervasive within the overall industry drag this assumption lower.
DCF Sensitivity Analysis
The following tables exemplify the reaction to implied equity value relative to two model assumption inputsdiscount rate and terminal growth rate. The discount rate acts inversely upon the implied stock value. The
terminal growth rate naturally increases the value of the company and therefore the implied stock value.
Because these are assumptions, and therefore not a guarantee of future behavior, it is incumbent upon us
to analyze the relationship between these inputs and our model output. Our price is green, other likely
outputs in yellow, and less likely outputs in red.
Base Case Sensitivity
Terminal Growth
17.42
8.5%
9.0%
Discount Rate
9.5%
10.0%
10.5%
11.0%
11.5%
2.0%
20.04
18.60
17.35
16.25
15.29
14.43
13.66
2.5%
20.99
19.38
18.00
16.80
15.75
14.82
13.99
3.0%
22.11
20.29
18.75
17.42
16.27
15.26
14.37
3.5%
23.46
21.37
19.62
18.14
16.87
15.77
14.80
4.0%
25.10
22.66
20.66
18.98
17.56
16.34
15.28
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Interest Rate +200bps Sensitivity
Terminal Growth
19.90
8.5%
Discount Rate
9.5%
10.0%
9.0%
10.5%
11.0%
11.5%
2.0%
22.91
21.25
19.81
18.55
17.44
16.45
15.56
2.5%
24.01
22.15
20.56
19.18
17.97
16.90
15.95
3.0%
25.30
23.20
21.43
19.90
18.57
17.41
16.39
3.5%
26.85
24.44
22.43
20.73
19.26
17.99
16.88
4.0%
28.75
25.93
23.62
21.70
20.06
18.65
17.43
Valuation Analysis
Multiple Valuation- Absolute Basis
The following table exhibits a calculated implied share price using multiples. For simplicity, each multiple
was given equal weight. The historic multiples look back 10 years while the targets are assumptions based
on company review. It is worth noting that the ten year multiples encapsulate one of the most tumultuous
times in banking history, are therefore view as somewhat depressed. Although simplistic, this measurement
gives at least a modicum of comfort relative to our ultimate target.
Multiple
P/E
P/B
P/S
High
18.59
1.25
2.93
Low
Median
1.34
0.51
0.44
Current
11.08
0.84
1.52
13.35
1.17
2.70
Target Multiple
14.60
1.27
2.95
Target E,S,B
Target Price
1.05
12.00
4.50
Expected Price
15.33
15.24
13.28
14.62
Multiple Valuation- Comparisons
Relative to
Industry
P/E
P/Forward E
P/B
P/S
10 Yr
Median
0.92
0.98
0.80
0.93
Current
0.80
0.89
1.02
1.22
Relative to
S&P 500
P/E
P/Forward E
P/B
P/S
10 Yr
Median
0.76
0.83
0.41
1.19
Current
0.67
0.77
0.43
1.55
We used the 10 year average to compare price multiples between the financial sector and KeyCorp, as well
as the S&P 500 and KeyCorp. A 1.00 indicates that KeyCorp moves in concert with the broader market.
Less than 1.00 indicates KeyCorp’s multiple is less than that of the comparable market. Compared to both
indices, Key appears to be discounted relative to earnings, both trailing and forward. Key is in a premium
position when compared to book value and sales.
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Columbus, OH
Conclusion
We recommend a BUY rating for KeyCorp with a 12-month price target of $17.42. This target indicates a
discount to the market of 27.2%, relative to the current price of $13.70. We also modelled an implied value
based on rising interest rates. This approach led to a 12-month price target of $19.90 which indicates a
discount to the current market price of 45.3%. Price multiples valuation reflects a price per share below
our target but still solidly above the current price by 7%. We are confident our model provides a much more
thorough outlook than that provided by the simplistic multiples valuation.
Key’s commercial loan growth and deposit costs will bode well in the upcoming months. The loan portfolio
will continue the trend of higher quality, leading to lower provisions for losses. The focus on efficiency will
lead to lower noninterest expense, boosting the bottom line. The return of capital to shareholders in the
form of dividends as well as the anti-dilutive effects of share buybacks will continue to strengthen
shareholder value.
16
Equity Research
Student Investment Management Program
Columbus, OH
Appendix I – Projected Income Statements
Base Case
2016E 2015E 2014E
REVENUE FROM CONTINUING OPERATIONS (TE)
Key Community Bank
Net interest income (TE)
Noninterest income
Key Corporate Bank
Net interest income (TE)
Noninterest income
Other Segments
Total Segments
Reconciling Items(a)
2013
2012
2011
2010
2009
1,472
753
1,456
750
1,572
778
1,526
774
1,475
770
1,425
766
1,619
791
1,723
773
802
855
448
4,455
-
787
830
427
4,343
-
771
805
406
4,228
-
756
770
757
803
782
751
742
876
387
414
299
363
4,116 4,160 4,004 4,452
(2)
(16)
(24)
39
880
706
259
4,341
100
Total
4,455
4,343
4,228
4,114
4,144
3,980
4,491
4,441
Key Community Bank
Provision for loan and lease losses
Noninterest expense
Key Corporate Bank
Provision for loan and lease losses
Noninterest expense
Total
148
151
154
156
150
1,876 1,857 1,830 1,794 1,870
(6)
(6)
(6)
(6)
24
989
942
897
854
846
3,006 2,944 2,875 2,798 2,890
148
1,754
413
1,828
731
1,934
Income (loss) before income taxes (TE)
Key Community Bank
Key Corporate Bank
Allocated income taxes and TE adjustments
Key Community Bank
Key Corporate Bank
(198)
(28)
825 1,024
2,529 3,237
1,826
1,351
5,842
326
674
291
681
260
686
241
690
205
651
304
872
169
683
(169)
(1,591)
78
162
70
164
63
165
90
246
76
239
113
318
8
250
(113)
(528)
248
512
512
363
221
517
517
346
198
521
521
330
151
444
444
314
129
412
3
409
256
191
554
554
209
161
433
(1)
434
(14)
(56)
(1,063)
(5)
(1,058)
(359)
Total Segments
Reconciling Items(a)
1,124
-
1,085
-
1,049
-
909
(39)
794
41
954
1
581
(4)
(1,473)
186
Total
1,124
1,085
1,049
870
835
955
577
(1,287)
Net income (loss) attributable to Key
Key Community Bank
Key Corporate Bank
less: Net income attributable to noncontrolling interest
Key Corporate Bank total
Other Segments
Category Growth
17
Equity Research
Student Investment Management Program
Columbus, OH
Interest Rate Increase of 200 bps
2016E 2015E 2014E
REVENUE FROM CONTINUING OPERATIONS (TE)
Key Community Bank
Net interest income (TE)
Noninterest income
Key Corporate Bank
Net interest income (TE)
Noninterest income
Other Segments
Total Segments
Reconciling Items(a)
2013
2012
2011
2010
2009
1,472
753
1,456
750
1,713
778
1,616
774
1,518
770
1,425
766
1,619
791
1,723
773
875
855
448
4,668
-
833
830
427
4,480
-
794
805
406
4,293
-
756
770
757
803
782
751
742
876
387
414
299
363
4,116 4,160 4,004 4,452
(2)
(16)
(24)
39
880
706
259
4,341
100
Total
4,668
4,480
4,293
4,114
4,144
3,980
4,491
4,441
Key Community Bank
Provision for loan and lease losses
Noninterest expense
Key Corporate Bank
Provision for loan and lease losses
Noninterest expense
Total
148
151
154
156
150
1,876 1,857 1,830 1,794 1,870
(6)
(6)
(6)
(6)
24
989
942
897
854
846
3,006 2,944 2,875 2,798 2,890
148
1,754
413
1,828
731
1,934
Income (loss) before income taxes (TE)
Key Community Bank
Key Corporate Bank
Allocated income taxes and TE adjustments
Key Community Bank
Key Corporate Bank
(198)
(28)
825 1,024
2,529 3,237
1,826
1,351
5,842
467
747
381
728
303
709
241
690
205
651
304
872
169
683
(169)
(1,591)
112
180
92
175
73
170
90
246
76
239
113
318
8
250
(113)
(528)
355
568
568
363
290
553
553
346
230
538
538
330
151
444
444
314
129
412
3
409
256
191
554
554
209
161
433
(1)
434
(14)
(56)
(1,063)
(5)
(1,058)
(359)
Total Segments
Reconciling Items(a)
1,286
-
1,189
-
1,098
-
909
(39)
794
41
954
1
581
(4)
(1,473)
186
Total
1,286
1,189
1,098
870
835
955
577
(1,287)
Net income (loss) attributable to Key
Key Community Bank
Key Corporate Bank
less: Net income attributable to noncontrolling interest
Key Corporate Bank total
Other Segments
Category Growth
18
Equity Research
Student Investment Management Program
Columbus, OH
Appendix II – Discounted Cash Flow Analysis
Base Case
Net Income
% growth
Terminal Discount Rate
Terminal FCF Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
2014E
1,049
10.0%
3.0%
7,602
7,674
15,276
Current Price
Implied equity value/share
Upside/(downside) to DCF
2016E
1,124
2017E
1,144
2018E
1,167
2019E
1,190
2020E
1,220
2021E
1,250
20122E
1,275
2023E
1,313
2024E
1,353
3.5%
3.6%
1.8%
2.0%
2.0%
2.5%
2.5%
2.0%
3.0%
3.0%
50%
50%
100%
Terminal Value
Free Cash Yield
11.5
14.6
Shares Outstanding
2015E
1,085
11.1
14.1
10.7
13.6
Terminal P/E
19,905
6.80%
14.7
876,800
13.70
17.42
27.2%
Interest Rate Increase of 200 bps
Net Income
% growth
Terminal Discount Rate
Terminal FCF Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Shares Outstanding
Current Price
Implied equity value/share
Upside/(downside) to DCF
2014E
1,098
10.0%
3.0%
8,603
8,845
17,448
2015E
1,189
2016E
1,286
2017E
1,318
2018E
1,344
2019E
1,371
2020E
1,406
2021E
1,441
20122E
1,470
2023E
1,514
2024E
1,559
8.2%
8.2%
2.5%
2.0%
2.0%
2.5%
2.5%
2.0%
3.0%
3.0%
49%
51%
100%
Terminal Value
Free Cash Yield
10.9
15.9
10.1
14.7
9.3
13.6
Terminal P/E
22,941
6.80%
14.7
876,800
13.70
19.90
45.3%
19
Equity Research
Student Investment Management Program
Columbus, OH
Appendix III – Sources

https://www.google.com/finance

http://www.investopedia.com/

http://investing.businessweek.com

http://www.reuters.com/

KeyCorp 2013 Annual Report

KeyCorp March 2014 10-Q Filing

KeyCorp June 2014 Earnings Call and Release

http://www.marketwatch.com/investing/stock/key/profile

http://investor.key.com/

www.Viningsparks.com

Bloomberg

S&P Capital IQ
20