KeyCorp (KEY) became one of the latest three banks to repay its bailout money. The company has fully repaid its $2.5 billion in outstanding Troubled Asset Relief Program (TARP) funds on Wednesday.
KeyCorp’s repayment was financed by proceeds from the recent $625 million common equity offerings and $1 billion debt offerings, in addition to other funds from available resources. Following the approval from the Federal Reserve earlier in the month, the company had announced the pricing of its public offerings of 70,621,470 shares of its common stock at a price of $8.85 per share.
KeyCorp repurchased all 25,000 shares of its Fixed-Rate Perpetual Preferred Stock, Series B, which were originally issued in December 2008 under TARP’s Capital Purchase Program. In all, the company paid approximately $297 million in dividends and interests to the Treasury.
Additionally, KeyCorp also aims to enter into negotiations to repurchase the warrant held by the Treasury. These warrants allow the Treasury to purchase up to 35,244,361 shares of the company. However, if the company is unable to buy back these warrants, it might issue sufficient number of common stock in order to mitigate any share dilution that would occur if these warrants are exercised.
Along with KeyCorp, SunTrust Banks Inc. (STI) and Financial Institutions Inc. (FISI) also repaid, respectively, $4.85 billion and $25 million of TARP funds on Wednesday. In February, Fifth Third Bancorp (FITB) also cleared its $3.4 billion due from the Treasury Department. Now among the banks that were subject to the Federal Reserve’s stress tests, only Regions Financial Corp. (RF) owes TARP money.
The Treasury has expended around $245 billion as direct financial support to banks. With the TARP repayment by KeyCorp, SunTrust and Financial Institutions, the Treasury has been able to recoup roughly $251 billion and currently estimates that the bank programs within TARP would fetch nearly $23.6 billion as profit to taxpayers.
While the larger Wall Street banks had repaid the TARP money earlier in 2009 and 2010, many regional banks shied away due to continued high levels of losses in their loan portfolio. The economy also remained under stress. However, the recent repayment of the TARP loan by a large number of these banks can be viewed as a sign of economic recovery and inspires our confidence in the financial system.
We expect that KeyCorp’s business restructuring actions will continue to fuel its credit quality, capital position and liquidity, although the company’s results are likely to be affected by the volatile operating environment and added costs of maintaining Basel III norms. Moreover, KeyCorp is anticipated to benefit from its focus on community banking expansion.
Furthermore, the TARP loan repayment is essentially a positive for KeyCorp removing restrictions on both financial and executives’ pay package flexibility that the company was subject to upon being a TARP receiver.
Currently, KeyCorp shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.
FINANCIAL INST (FISI): Free Stock Analysis Report
FIFTH THIRD BK (FITB): Free Stock Analysis Report
KEYCORP NEW (KEY): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
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