KeyCorp, Regions Financial gain bull ratings at Jefferies as rates turn

Jefferies upgraded KeyCorp (NYSE:KEY) and Regions Financial (NYSE:RF) to Buy from Hold on Tuesday as both stocks are trading at low multiples compared with other large regional banks.

For U.S. banks in general, "the timing bridge between '24 EPS softness and '25 improvement will be important," analyst Ken Usdin wrote in a note to clients. He sees potential for "more expansion in a benign soft landing, plus help from growing book values and capital ratios."

KeyCorp (KEY) "has the most benefits to its forward net interest income performance from the maturities of low-yielding UST securities and low rate receive-fixed swaps," the analyst said. In addition, if fee performance may improve and costs remain flattish, the bank can deliver positive operating leverage for the year.

KEY's forward price-to-earnings multiple, at ~9x on 2024E EPS (excluding reserve build/release) compares with 10x for large regional banks.

Usdin's rating on KeyCorp (KEY) aligns with the SA Quant rating and average Wall Street rating, both at Buy, but is more bullish than the average SA Analyst rating of Hold.

Meanwhile, Usdin said that the markets are not appreciating Region Financial's (RF) high return on tangible common equity. From the deposit cost side, he sees some factors in RF's favor. Some 15% of the bank's deposit base is indexed and should reprice lower quickly once rated decline. "Another 15% are market-priced CDs that should also decline as rates peak and turn," he said.

The bank's swap profile on the loan side "will also fix-out its earning asset yields on the way down, helping to keep net interest margin in the 3.5% zone as it bottoms in 1Q24."

Regions (RF) P/E multiple sits at 8.8x on Jefferies' 2025 EPS estimate adjusted for reserve build/release.

Usdin's Buy rating on Regions (RF) contrasts with the SA Quant rating, the average SA Analyst rating, and the average Wall Street rating, all at Hold.

Even with the upgrades, both stocks slipped along with other banks in Tuesday morning trading. KeyCorp (KEY) fell 0.7% in late morning trading, and Regions Financial (RF) dipped 1.0%. By comparison the KBW Nasdaq Bank Index (BKX) fell 1.0%.