Bank of America Corporation (BAC) and KeyCorp (KEY) are two prominent players in the banking industry. BAC provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. However, KEY provides retail and commercial banking, commercial leasing, investment management, and investment banking products and services to individual, corporate, and institutional clients.
Though the Federal Reserve is expected to maintain the low interest rate environment despite rising inflation during the economic recovery period, rising economic activities, business loan demand , and capital markets transactions should allow banks with diversified sources of revenues to benefit in the near term. Furthermore, technological advancements should help banks generate decent revenue in the digital era. The global financial services market is expected to grow at a 6% CAGR to reach $28.53 trillion by 2025. So, both BAC and KEY should witness a decent growth in the coming quarters.
While KEY has gained 7.7% over the past month, BAC returned 21%. In terms of past year’s performance, KEY is a winner with 73.9% gains versus BAC’s 72.8% returns. But which of these stocks is a better pick now? Let’s find out.
Latest Movements
On June 23, 2021, BAC launched Personal Retirement Strategy, a new digital investment advisory program added to the Financial Life Benefits suite of its Workplace Solutions. Delivering personalized insights, guidance and tools, as well as access to digital investment management services, this program is designed to help plan client employees establish and pursue their retirement income goals. BAC is expected to generate rising enrollment in this program in the coming months.
On May 3, 2021, KEY’s KeyBanc Capital Markets (KBCM) subsidiary added a six-person renewable energy investment banking team to its Utilities, Power & Renewables Group. As a leading provider of strategic, merger and acquisition advisory services to the U.S. renewable energy industry, this new team will further enhance and expand on KBCM's leading North American and syndicated finance practice serving the renewable energy industry.
Recent Financial Results
BAC’s total revenues for its fiscal first quarter, ended March 31, 2021, increased marginally year-over-year to $22.82 billion. The company’s pre-tax income has been reported at $9.17 billion, which represents a 102.3% year-over-year improvement. BAC’s net income came in at $7.56 billion, up 113.5% from the prior-year period. Its adjusted EPS increased 45.8% year-over-year to $0.86.
For its fiscal first quarter, ended March 31, 2021, KEY’s total revenues increased 19.4% year-over-year to $1.75 billion. The company’s pre-tax income came in at $765 million, which represents a 355.4% rise year-over-year. Its net income has been reported at $622 million, up 326% from the prior-year period. Its EPS increased 408.3% year-over-year to $0.61.
Past and Expected Financial Performance
BAC’s EPS and net income grew at CAGRs of 10.6% and 3.5%, respectively, over the past three years. The company’s revenue has declined at 1.6% CAGR over the past three years.
Analysts expect BAC’s revenue to increase 5.3% in the current quarter (ending September 30, 2021), 2% in the current year and 3.4% next year. Its EPS is expected to increase 38.5% in the current quarter, 62.4% in the current year and 1.9% next year. The stock’s EPS is expected to grow at 24.3% rate per annum over the next five years.
In comparison, KEY’s EPS and net income grew at 12.5% and 9.4% CAGRs, respectively, over the past three years. The company’s EPS has grown at a 1.8% CAGR over the past three years.
Analysts expect KEY's revenue to increase 1.4% in the current quarter (ending September 30, 2021), 3% in the current year, but decline marginally next year. However, its EPS is expected to increase 28.2% in the current quarter, 73% in the current year, but decline 9.5% next year. However, analysts expect the stock’s EPS to grow at a rate of 11.4% per annum over the next five years.
Profitability
BAC's trailing-12-month revenue is 12.6 times what KEY generates. However, KEY is more profitable with a 28.4% net income margin versus BAC’s 27.1%.
Also, KEY’s 10.3% and 1.1% respective ROE and ROA values compare favorably with BAC’s 8.1% and 0.8%.
Valuation
In terms of non-GAAP forward P/E, BAC is currently trading at 13.09x, which is 43.2% higher than KEY’s 9.14x. BAC’s 4.29x trailing-12-month Price/Sales is 42.5% higher than KEY’s 3.01x.
Also, in terms of trailing-12-month Price-to-Book, BAC’s 1.37x is 11.4% higher than KEY’s 1.23x.
Thus, KEY is more affordable here.
POWR Ratings
While BAC has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, KEY has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
In terms of Growth, KEY has been graded a B, which is consistent with its higher-than-industry growth over the past year. The company has witnessed a 29.2% rise in EPS, which is 24.7% higher than the 23.4% industry average. In comparison, BAC’s C grade for Growth is in sync with a negative value for its revenue growth.
KEY has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. The company’s 1.18x forward Price/Book value is 3.7% higher than the 1.14x industry average. However, BAC’s D grade for Value reflects its overvaluation. The stock is currently trading at 17.06x its non-GAAP trailing-12-month earnings per share, which is 38.8% higher than the 12.29x industry average.
Of 11 stocks in the Money Center Banks industry, BAC is ranked #8, while KEY is ranked #1.
Beyond what we’ve stated above, our POWR Ratings system has also rated both BAC and KEY for Quality, Momentum, Stability, and Sentiment. Get all BAC ratings here. Also, click here to see the additional POWR Ratings for KEY.
The Winner
Because the resumption of economic activities has significantly contributed to U.S. GDP growth, the financial services sector is expected to benefit in the recovery period, owing to its cyclical nature. Both BAC and KEY are well-positioned to capitalize on industry tailwinds. However, better profit margins and lower valuation make KEY a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Money Center Banks industry.
BAC shares were trading at $39.00 per share on Thursday afternoon, down $0.75 (-1.89%). Year-to-date, BAC has gained 29.85%, versus a 16.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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