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Will the KeyCorp-First Niagara Deal Face Legal Trouble?

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KeyCorp.’s (KEY - Free Report) deal to acquire Buffalo, NY-based First Niagara Financial Group Inc. might be in trouble again as U.S. regulators have launched a probe into the latter’s minority-lending practices. Notably, the investigation was initiated more than two years ago by the Justice Department.

According to Bloomberg, U.S. regulators are suspicious that First Niagara has been violating a federal law which bans companies from discriminating in issuing loans. However, the effect of the outcome of the investigations on the deal is uncertain.

First Niagara “will continue to engage in safe, sound and fair banking practices that focus on the underserved,” said David Lanzillo, a company spokesman who declined to comment on the investigation or its implications on the sale. Moreover, spokesmen for the Justice Department and KeyCorp refrained from commenting on the matter.

Previously, U.S. lenders were accused for discriminating against minority and female borrowers with the aim of recording higher earnings which led to a rise in foreclosures during the financial downturn. Among others, Wells Fargo & Company (WFC - Free Report) settled a similar case for $235 million while Bank of America Corporation (BAC - Free Report) agreed on a $335 million settlement.

The Deal in Brief

The stock-and-cash deal, worth approximately $4.1 billion, is expected to prove accretive to earnings in 2017, excluding merger and integration costs of approximately $550 million. Also, KeyCorp anticipates savings of $400 million in annual expenses. Further, KeyCorp and First Niagara have overlapping operations that will strengthen the former’s revenue base.

Moreover, upon closure, the combined entity will enjoy a diverse footprint across markets in the Northeast, Mid-Atlantic, Midwest and Pacific Northwest. KeyCorp will have roughly $99.8 billion in deposits, $83.6 billion in loans and 1,366 branches across 15 states.

While the Federal Reserve extended the public comment period by a month in Dec 2015, Governor Andrew Cuomo officially urged the federal regulators to stall the merger deal in Feb 2016. This had raised significant anti-trust concerns that the proposed acquisition of First Niagara by Key Bank would have a devastating impact on consumers and businesses.

Conclusion

Despite cost savings and revenue synergies, we believe KeyCorp will have a challenging time convincing the public about the potential long-term benefits of the deal. Moreover, the company is not certain about the impact the investigations will have on the impending deal.

Currently, KeyCorp carries a Zacks Rank #3 (Hold) while First Niagara has a Zacks Rank #2 (Buy).

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