KeyCorp's (KEY) Valuation Dilemma: Undervalued Glimmer or Overpriced Optimism?

In the ever-shifting landscape of banking stocks, KeyCorp (KEY) has emerged as a focal point for investors seeking value amid a sector grappling with macroeconomic headwinds. With Q3 2025 results showcasing a rebound in earnings and a strategic pivot in lending rates, the question looms: Is KeyCorp's current valuation a reflection of its fundamentals, or is it a precarious bet on future optimism?

Fundamental Strength: A Turnaround in the Making

KeyCorp's Q3 2025 financials reveal a marked improvement from the previous year. The bank reported net income of $489 million, reversing a net loss in Q3 2024, according to Simply Wall St. Net interest income surged to $1.18 billion, bolstered by a reduction in the prime lending rate to 7.00% as of October 30, 2025, according to Simply Wall St. This adjustment, aimed at maintaining competitiveness, also signals a potential trade-off with net interest margins. Meanwhile, net loan charge-offs dropped to $114 million, a 15% decline year-over-year, indicating stronger credit quality, according to Simply Wall St.

The bank's balance sheet further underscores resilience. A debt-to-equity ratio of 0.76 suggests moderate leverage, according to GuruFocus, while tangible book value per share rose 4% sequentially to $15.86, reflecting asset repositioning and operational efficiency, according to GuruFocus. These metrics paint a picture of a regional bank recalibrating for long-term stability.

Valuation Multiples: A Tale of Two Ratios

KeyCorp's valuation, however, tells a more nuanced story. The stock trades at a P/E ratio of 20.94, significantly above the banking industry average of 8.99 as of October 30, 2025, according to McKinsey. This premium implies that investors are pricing in robust future earnings growth, despite the sector's broader skepticism. For context, the "Banks - Regional" sub-sector averages a P/E of 13.01, making KeyCorp's multiple appear elevated, according to FullRatio.

The P/B ratio, a critical metric for banks, reveals a starker divergence. While some sources report a P/B of 1.16, according to GuruFocus, others cite 4.30, according to CompanyMarketCap, creating confusion. The banking industry's average P/B ratio in 2025 is 1, a 67% discount to other sectors, according to McKinsey. If KeyCorp's P/B is indeed 1.16, it aligns with the sector's modest valuation. Yet, a 4.30 multiple would position it as a premium asset, raising questions about sustainability.

Analyst Perspectives: Caution Over Conviction

Analysts remain divided. A consensus "Hold" rating is supported by a price target of $20.75, with forecasts ranging from $19.00 to $23.00, according to McKinsey. While some bullish reports highlight KeyCorp's strategic asset repositioning and improved credit metrics, according to QuantisNow, others caution against overvaluation. TD Cowen recently lowered its price target to $19 from $21, citing M&A risks, according to Investing.com. This duality reflects the tension between KeyCorp's operational turnaround and the sector's structural challenges, such as interest rate volatility and regulatory pressures.

The Verdict: Balancing Optimism and Realism

KeyCorp's valuation dilemma hinges on reconciling its fundamental strength with elevated multiples. The bank's Q3 performance-marked by improved earnings and credit quality-suggests a solid foundation. However, a P/E ratio nearly 2.3x the industry average and a P/B ratio that could be either in line or out of step with the sector demands scrutiny.

For investors, the key lies in KeyCorp's ability to sustain its earnings momentum while navigating macroeconomic risks. If the bank can maintain its cost discipline and capitalize on its regional market presence, the current valuation may prove justified. Conversely, if interest rate normalization or credit deterioration pressures earnings, the premium could erode.

In the end, KeyCorp's story is one of cautious optimism-a regional bank striving to outperform in a sector where the odds are stacked against it.