CCAR Preview: Will KeyCorp (KEY) Investors Have Cause to Cheer? – Citigroup Inc. (C), JPMorgan Chase & Co. (JPM)

It’s official: Banks have made a truly amazing recovery from those dark days of the financial crisis, and the Fed’s recent stress test is proof positive of this fact. The nation’s biggest banks made a spectacular showing, with Bank of America (NYSE:BAC) and Citigroup Inc. (NYSE:C) in particular flaunting their bulked-up capital ratios.

This year, the Fed broke the up the Dodd-Frank Stress Test scenario into two parts, creating a full week of headline-grabbing banking news. After the excellent stress test results of March 7, we will soon find out which banks will be returning capital to investors when the Comprehensive Capital Analysis and Review results are revealed this Thursday.

Citigroup Inc (NYSE:C)Although the biggest banks have been getting most of the press, smaller banks received superb grades, as well. One of these is KeyCorp (NYSE:KEY) , the Ohio-based money center bank that went into the stress test with one of the highest capital levels of all.

Should KeyCorp ask for a dividend increase or share buyback?
As Fool Analyst David Hanson recently noted, KeyCorp produced a notable improvement in its Tier 1 common “stressed” ratio, bumping that metric up to 8% from last year’s 6.3%, placing it ahead of well-capitalized super-bank JPMorgan Chase & Co. (NYSE:JPM).

KeyCorp (NYSE:KEY) has strengthened its position since the financial crisis, paying back government bailout funds while bumping up capital. Earnings power — a consideration of importance in the Fed’s stress testing — is also gaining momentum, as the bank takes advantage of a surge in commercial and industrial lending. In addition, the bank was able to increase its fourth-quarter 2012 net interest margin year over year by a robust 24 basis points. I think KeyCorp is in a good position to share some of its largesse with investors — and I’m betting the Fed will feel the same way.