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KeyCorp.’s (KEY - Analyst Report) efficient expense control, along with steady capital deployment activities, places it well ahead of its peers. The stock closed at $13.08 on Dec 12, reflecting a strong year-to-date return of 51.9%. Going forward, with consistent improvement in the credit quality and strong capital ratios, there are fair chances of price appreciation. Therefore, continuing to hold the company’s shares in your portfolio should be rewarding.

However, given the tepid economic recovery, stringent regulatory restrictions and the prevailing low interest-rate scenario, we discourage further addition of its shares to your portfolio.

Justifying the Stance

KeyCorp’ third-quarter 2013 earnings per share of 28 cents came in ahead of the Zacks Consensus Estimate and the year-ago quarter figure of 22 cents. Results were primarily driven by growth in net interest income, partially offset by lower non-interest income and a slight rise in operating expenses.

KeyCorp’s expense reduction program – “Fit for Growth” – seems impressive. Notably, the company has already surpassed the slated expense reduction target of $200 million for 2013 in the third quarter itself.

Efficient capital deployment activities in the form of regular share purchases and dividend hikes continue to boost investors’ confidence in the stock. Further, KeyCorp has also received the Federal Reserve’s approval to utilize the net after tax cash gain of $72 million from the divesture of Victory Capital Management to buy back additional shares.

However, we expect the pressure on net interest margin (NIM) to persist in the near term due to the soft new loan demand. Further, market dislocations over the last couple of years have led to deterioration in the valuation of many of the asset categories in KeyCorp’s balance sheet. Hence, stability of the balance sheet remains a major challenge for the company at this point.

In line with our analysis, the Zacks Consensus Estimate underwent no revision over the last 30 days. While the Zacks Consensus Estimate for 2013 was 94 cents, for 2014 it was $1.02. Hence, KeyCorp currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked banks include BofI Holding, Inc. (BOFI - Snapshot Report), Fifth Third Bancorp (FITB - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report). While BofI Holding carries a Zacks Rank #1 (Strong Buy), Fifth Third and Wells Fargo have a Zacks Rank #2 (Buy).

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