Fed's Income Test Threatens KeyCorp Dividends, BofA Says In Downgrade

Shares of KeyCorp Inc KEY could underperform peers due to the company’s greater risk of a dividend cut and higher exposure to industries facing risk of a default in a coronavirus-led downturn, according to BofA Securities.

The KeyCorp Analyst: Erika Najarian downgraded KeyCorp from Neutral to Underperform and lowered the price target from $15 to $12.

The KeyCorp Thesis: The language of the Fed’s income payout test appears focused on the third quarter of 2020, Najarian said in the Friday downgrade note. (See her track record here.)

Although KeyCorp has already declared its third-quarter dividend, the Fed’s instructions implying that it will revisit the income test for this quarter means that a dividend cut could still be in the offing, the analyst said. 

The new income test on dividends requires banks to keep quarterly earnings at a level that can support a dividend payout of 19 cents per share. This could create an overhang on KeyCorp’s stock due to concerns over its levels of reserves, she said. 

The new income test also requires banks to “aggressively and appropriately build reserves,” which puts KeyCorp’s ability to earn dividend at risk, Najarian said. 

The analyst reduced the earnings estimates for 2020 and 2021 from 70 cents per share to 46 cents per share and from $1 per share to $1.24 per share, respectively.

KEY Price Action: Shares of KeyCorp were up 2.9% at $11.34 at last check.

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