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KeyCorp shares fall after the bank uncovers $90 million fraud by payrolls processor

Key Points
  • KeyCorp says in a filing the fraud involves a "business customer" and was discovered "on or about" July 9.
  • The bank says it believes this was an isolated incident based on its "review of the circumstances of the fraudulent activity."
  • KeyCorp shares are up 19% year to date through Monday's close.
A KeyBank sign with a market ticker is seen on the facade of the KeyBank Building in Columbus, Ohio.
Jay Laprete | Bloomberg | Getty Images

Shares of KeyCorp fell Tuesday after the regional bank disclosed fraudulent activity that could cost the company up to $90 million.

Cleveland-based KeyCorp said in an 8-K filing the fraud involves a "business customer" and was discovered "on or about" July 9. The fraud took place in the third quarter, which started earlier this month, the company said.

The customer in question is Interlogic Outsourcing, a payrolls processing company based in Elkhart, Indiana, according to a lawsuit. On July 9, KeyBank National Association — a subsidiary of KeyCorp — filed a lawsuit against Interlogic claiming the payments processor "fraudulently initiated wire transfers." The suit also claims, according to a report from The South Bend Tribune, that Interlogic CEO Najeeb Khan knew there weren't sufficient funds to cover the transfers.

David George, an analyst at Baird, said the news is "unfortunate" but added the situation is "manageable."

"While we acknowledge that this isn't a pretty headline, we believe any weakness beyond 1.5%-2% is an opportunity to add to positions," George said in a note, reiterating his outperform rating on the stock. "KEY remains well positioned for the current environment, given its neutral rate positioning and opportunity to cut costs to the extent rates remain low."

Interlogic did not immediately respond to CNBC's request for comment.

KeyCorp shares fell 1.2%. The loss shaves off about $213 million from KeyCorp's market cap, bringing it down to about $17.52 billion from $17.735 billion.

"The Company is working with the appropriate law enforcement authorities in connection with this matter," KeyCorp said in the filing. The bank added it believes this was an isolated incident based on its "review of the circumstances of the fraudulent activity" and it will "pursue all available sources" to mitigate a potential loss.

KeyCorp shares were up 19% this year through Monday's close. The stock has outperformed the SPDR S&P Regional Banking ETF (KRE) in 2019, which is up 13.1%.

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—CNBC's Michael Bloom contributed to this report.