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KeyCorp (KEY) has suffered from souring loans and problems with areas including underwriting and recreational-vehicle lending. Its shares are off 72% since last year. Still, today it boasts a solid capital ratio, a healthy banking network and deposit base, and it's exiting some problem businesses. Barron's Lawrence C. Strauss thinks shares could double or triple when the economy revives if the bank keeps working on its problem loans.

KeyCorp is 'a little more geographically diversified, and it has better capital ratios' than many peers, says analyst Chris Fortune. Importantly, KeyCorp's Tier 1 capital is a healthy 10.8%. It raised around $1.7B last year by issuing common and preferred shares, and it cut its dividend twice to save cash.

Analysts expect short-term losses from KeyCorp as its loan portfolio continues to hurt in areas like commercial real estate. However, management has worked aggressively to sell off problem loans. KeyCorp doesn't have exposure to some hard-hit consumer areas, including credit cards and auto loans, and it sold its subprime arm in 2006. The bank has enough capital to make it through what is expected to be a bumpy '09. A solid base of deposits, averaging around $62B in Q3, provides a relatively cheap source of funding.

KeyCorp has two main businesses, with community banking currently the better performing of the two. With nearly 1,000 geographically diverse branches, these branches and deposits could lure a buyer as the industry consolidates. The national banking arm includes investment banking, real estate financing and equipment leasing, all of which have been hit hard.

Some investors think KeyCorp's preferred shares are the better play. Standing higher in the capital structure than common shares, preferreds, with a 7% coupon, yield nearly 13%.

  • Shares are 'a pretty good deal' at 0.5 times tangible book value according to analyst Maclovio Pina. Pina puts fair value at $16/share vs. Friday's $6.31.
  • Goldman Sachs analyst Brian Foran has a Buy rating on KeyCorp.

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  • KeyCorp has received $2.5B in government funds through TARP in exchange for preferred shares.
  • KeyCorp's latest dividend update included a regular cash dividend of $0.0625 per share of its common shares, or $0.25 per share on an annualized basis.
Source: KeyCorp Holds Keys to Success - Barron's