A Key to Investing in the Regional Bank KeyCorp

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Part 6
A Key to Investing in the Regional Bank KeyCorp PART 6 OF 10

KeyCorp’s Deposit Growth Trails the Industry

Deposit mix

Deposits are the most crucial source of funds for any bank. They are also the cheapest source of funds and impact the bank’s overall funding costs. Banks that have lower cost deposits compared to other banks have a competitive advantage. Deposits represent more than 85% of funds used by KeyCorp (KEY) to support its loans and other earning assets.

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NOW (negotiable order of withdrawal), MMDA (money market deposit accounts), and savings deposits are low-cost deposits. Money market accounts typically pay a higher interest rate than savings accounts and require a higher minimum balance.

NOW deposits are similar to interest-bearing demand deposits. Non-interest bearing and low-cost deposits form a major chunk of KeyCorp’s total deposits.

The graph above shows KeyCorp’s deposit growth by type of deposit over the last two years. KeyCorp forms ~1.66% of the SPDR S&P Bank ETF (KBE) and ~3.1% of the iShares U.S. Regional Banks ETF (IAT).

Deposit growth lower than the industry

KeyCorp’s deposit growth at a CAGR (compound annual growth rate) was 3.5% since 2010. This is lower than the industry average. The CAGR deposit growth was 10% for JP Morgan (JPM), 8% for U.S. Bancorp (USB) and Wells Fargo (WFC), 6% for PNC Financial Services (PNC), 3% for Bank of America (BAC), and 2% for Citigroup (C) during the same period.

Deposit growth indicates the trust depositors have in the bank for their money. It shows a bank’s value as a consumer banking franchise. Deposit growth forms the basis for sound business growth and loan origination. Lower deposit growth partly explains KeyCorp’s lower loan growth.

Cost of deposits is declining

Like other banks, KeyCorp’s cost of deposits is declining driven by the sustained low interest rate environment. At the end of 4Q14, KeyCorp’s cost of total deposits stood at 0.15%.


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