KeyCorp’s (KEY) stock has significantly underperformed the broader market over the last year, and it has been pretty much the same story so far in 2020.

ChartData by YCharts

The COVID-19 (and low interest rate) environment is going to be a significant headwind for KeyCorp, and the other regional banks, through at least the end of 2020 but I think that investors with a time horizon longer than a year or two should seriously consider staying the course.

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KeyCorp reported Q3 2020 results that beat the top- and bottom-line estimates. The bank reported Q3 2020 adjusted EPS of $0.41 (beat by $0.04) on revenue of $1.69B (beat by $10mm).

Highlights from the quarter:

Source: Q3 2020 Earnings Slides

The bank’s top-line grew by ~4% YoY but the real surprise was KeyCorp’s provision charge that came in at only $160mm (vs the consensus estimate of $231mm), which obviously helped in terms of quarterly earnings.

And as shown above, KeyCorp reported strong return metrics (return-on-assets and return-on-tangible-equity) but the bank’s disappointing net interest margin caused some investor concern. On a more positive note, management talked up KeyCorp’s strong balance sheet growth and higher fee income, as the bank reported double-digit growth in both average loans and deposits.

KeyCorp’s quarterly results were without a doubt pressured by the economic impact of COVID and management fully expects for these headwinds to stay in place through at least the end of the current fiscal year. However, any way you slice it, KeyCorp’s Q3 2020 results were impressive, especially considering the backdrop. Additionally, nothing that I read in the earnings report changed my view of KeyCorp being a solid long-term investment.

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Looking Ahead,Tough Sledding But I See A Clear Path Ahead

Everyone already knows just how impactful the low interest rate environment has been on the regional banks, including KeyCorp, so I don’t think we need to spend too much time on the topic. However, I do believe that it is important to note that management has been repositioning this bank for awhile now to mitigate the downward pressure of lower rates and real progress continues to be made.

Now to the real risk, i.e., COVID. I believe that the most significant headwind that KeyCorp will face over the next few months will definitely be the prolonged negative economic impact from COVID-19, especially if another stimulus bill is not rolled out in the near[ish] future. However, it is encouraging that management is still guiding for a solid finish to 2020.

Source: Q3 2020 Earnings Slides

Moreover, the future appears to be brighter than the current state if the economic recovery really comes to fruition (as predicted) in late 2020/early 2021.

Plus, the Q3 2020 numbers for companies of the S&P 500 have not been terrible so far.

Source: FactSet

Two points: 84% of the companies beat analyst estimates (a record high) and the reported earnings are down only 6.6% (yes, “only” – the earnings results could have been a lot worst given the backdrop).

A COVID vaccine would definitely be a game-changer, especially for the regional banks. However, I don’t anticipate the real impact of the vaccine to be felt until early-to-mid 2021. As such, it will likely be tough sledding for KeyCorp through the next few months but, in my opinion, I see a clear path ahead. I would contend that KeyCorp is well-positioned for 2021, regardless of the near term environment (i.e., the bank will be able to maintain if it takes longer than anticipated to rollout the soon-to-be approved vaccine).

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And a new Coronavirus relief bill later in 2020 would be a nice kicker.

Valuation

KeyCorp’s stock is attractively valued based on several of the bank’s own historical metrics.

Source: Morningstar

Moreover, the bank is trading at a discount when compared to its peer group based on two key metrics.

ChartData by YCharts

I believe that valuation alone is a legitimate reason why KEY shareholders should seriously consider staying the course.

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes KeyCorp. I believe that the regulatory environment has improved, but this could change in short order.

The Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy in 2021 would negatively impact the banking sector. The COVID-19 related impacts should be closely monitored in the months ahead. If the economy is “shut down” again, KeyCorp’s stock will likely continue its downward trend.

Bottom Line

The financial sector in general has fallen out of favor so it should come as no surprise that KeyCorp’s stock has underperformed the broader market. In my opinion, KeyCorp’s stock is down for good reasons.

But I believe that the KeyCorp’s Q3 2020 earnings report supports the idea that this bank is a great long-term investment, even if the backdrop gets worst before it gets better. To this point, I think that investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

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Disclosure: I am/we are long KEY, FITB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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