Regional banks spent much of last week under pressure from short sellers and their financial stability under the microscope. First Republic Bank became the next on the list of regional banks that stumbled and needed to be saved by “too big to fail” JP Morgan. (1)
At first, investors were told that Signature Bank and Silicon Valley Bank were one off events caused by mismanagement, similar to inflation in transitory. The one cockroach theory almost always fails because more are lurking in the dark that you cannot see.
More struggling regional banks will come into the light.
SoFi’s Liz Young says, “The issue originally was that deposit flight was occurring. … But now that the pressure is no longer necessarily deposit flight. It’s this mark to market of the securities on all their books.” (2)
Mark to Market is a scary investment term for those who remember the subprime crisis. In a nutshell, financial firms use leverage. For example, for every dollar they have on the books, they can buy $10 worth of stuff, sort of like super-sized margin accounts. Many times, financial institutions buy illiquid, complicated investment products. Since they don’t trade with the same sort of regularity of stocks, their prices are sort of set subjectively. If the bank prices it at $2 on the balance sheet, then it’s worth $2.
When stuff hits the fan, then financial institutions have to actually find the true market price i.e., what some other party will actually pay. Zillow may say your house is worth $1 million and the local tax person might agree, but if you try to sell and the best price you can get is $700,000, then the true market value is $700,000.
Mark to Market usually means downward adjustments. Financial institutions put the house on the books at $1 million but can only get $700,000. Instantly, it’s a 30 percent haircut. Financial instructions are required to meet certain financial conditions. Many times, marking to market puts them into violation. Then they need to sell other assets to get back into compliance. Of course, all the counterparties know a lot of selling is coming into the market, more sellers than buyers equal lower prices. It can become a terrible cycle as we saw in 2008.
It’s interesting to see how insiders in the at-risk market react with the understanding of how this butterfly flap to hurricane situation could play out.
KeyCorp (KEY) Head of Institutional Bank Andrew J Paine’s buy of 75,000 shares at $9.78 for an investment of $733,500 is an example of an against the wind trade that caught our attention. Paine isn’t a habitual trader and has been on the right side in his limited activity.
In November 2016, he bought a little bit of KEY stock at $14.06. Almost a year later, the co-Head of Institutional Bank at the time, hit the red button for the first of three sales:
- October 2017 at $18.56
- July 2019 at $18.26
- April 2021 at $21.34
In total, the trio of sells put more than $3.44 million in Paine’s bank accounts. He bought low, sold high, and made the correct call. (3) Let’s see if he can do it again.
KeyCorp has been through a lot of tough times, from the Civil War to today. The regional bank was founded in 1849 and is headquartered in Cleveland, Ohio. It operates as the holding company for KeyBank National Association that provides various retail and commercial banking products and services in the United States. It operates in two segments, Consumer Bank and Commercial Bank.
Analysts believe Paine might be on the ride side of the KEY trade again with a consensus, one-year price target of $15.98. That’s potential upside to target of 62.6 percent from May 5, 2023’s close of $9.83. And get this, the company pays a dividend of $0.82 per share or an annual yield of 8.6 percent. (4) According to the company’s investor relations’ page, KEY has paid a dividend every year since 1990. (5) It’s probably longer than that, but that’s as far back as the record keeping goes.
OVERALL: Crisis can create opportunity. KeyCorp (KEY) has passed the test of time and many tribulations. History says it’s likely to withstand this challenge as well. Although, we all know, past performance is no guarantee of future success. KEY’s potential price appreciation and current dividend yield make it an attractive growth and income play for investors with above-average risk tolerance and a time horizon of at least two years, maybe more as the regional banking turmoil unfolds.
1 – https://www.investing.com/news/stock-market-news/4-big-deal-reports-more-tremors-across-regional-banks-3075233
2 – https://www.cnbc.com/2023/05/04/stock-market-today-live-updates.html
3 – https://www.secform4.com/insider-trading/1669883.htm
4 – https://finance.yahoo.com/quote/KEY?p=KEY
5 – https://investor.key.com/stocks-dividends/stock-splits-and-dividends/default.aspx