KeyCorp trades at $22.54 and has moved in lockstep with the market. Its shares have returned 9.5% over the last six months while the S&P 500 has gained 9.3%.
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Why Is KeyCorp Not Exciting?
We don’t have much confidence in KeyCorp. Here are three reasons we avoid KEY, plus one stock we’d rather own.
1. Net Interest Income Points to Soft Demand
While banks generate revenue from multiple sources, investors view net interest income as a cornerstone — its predictable, recurring characteristics stand in sharp contrast to the volatility of one-time fees.
KeyCorp’s net interest income has grown at a 3.4% annualized rate over the last five years, much worse than the broader banking industry. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.
2. 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 2.6%, meaning it must compensate for lower profitability through increased loan originations.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for KeyCorp, its EPS declined by 1.5% annually over the last five years while its revenue grew by 1.9%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
KeyCorp isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 1.3× forward P/B (or $22.54 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of KeyCorp
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