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Higher Loans, Rates to Support KeyCorp's (KEY) Q4 Earnings

Zacks Equity Research

KeyCorp KEY is scheduled to report fourth-quarter 2018 results on Jan 17, before the opening bell. The company is expected to show some improvement in net interest income (NII), driven by higher interest rates and decent loan growth while flattening of the yield curve and higher deposit betas will likely to hamper growth to some extent.

While the overall loan growth in the fourth quarter was modest, commercial and industrial loans (accounting for nearly 50% of KeyCorp’s average loan balances) witnessed a substantial rise. The Zacks Consensus Estimate for average total loans of $89.7 billion for the quarter indicates growth of 1.3% sequentially.

Notably, management expects average loans to increase 1-2% from the prior quarter. Average deposits are expected to be in line with the third-quarter level.

Further, backed by loan growth, earning assets are likely to rise. The consensus estimate for average interest earning assets of $125.3 billion for the to-be-reported quarter indicates an increase of 1.3% from the prior-quarter end.

Hence, KeyCorp’s NII, one of the main revenue sources, is expected to support earnings growth. Management anticipates tax-equivalent NII to increase 1-2% (includes benefits of September rate hike). Net interest margin is likely to increase 1-2 basis points, on the assumption of no change in the company’s liquidity position.

Let’s check out the other main factors that are likely to influence KeyCorp’s fourth-quarter performance:

Slight non-interest income growth: KeyCorp’s fourth-quarter non-interest income will likely benefit from a rise in service charge on deposits as deposit balances are expected to improve.

Seasonal slowdown and lower debt placement activities are expected to hamper KeyCorp’s investment banking performance to some extent. Also, decline in global M&A deal volume in the quarter will likely hamper the company’s advisory fees to some extent. Nonetheless, strong M&A deal pipeline over the prior quarters will likely provide respite.

Further, mortgage banking fees are not expected to improve much, mainly due to a slowdown in refinancing activities due to higher rates and lower mortgage originations.

Nonetheless, management expects non-interest income to rise in the mid-single digits range sequentially. This is expected to be driven by higher investment banking and debt placement fees, deposit service charges, and cards and payments revenues.

Expenses might not provide much support: While KeyCorp’s efforts to diversify products, reorganize operations and exit unprofitable/non-core businesses are likely to save costs, its continued investments in its franchise and inorganic growth strategies are expected to keep overall expenses elevated.

The company expects non-interest expenses to be stable on a sequential basis.

Asset quality to support results: The consensus estimate for non-performing asset of $430 million indicates a decline of 33.5% sequentially. Likewise, estimates for non-performing loans of $377 million reflect a decrease of 41.6% from the prior quarter.

As KeyCorp is likely to witness rise in loans, a corresponding increase in provision for loan losses is expected. Overall, this is expected to be manageable.

The company expects net charge-offs and provision expenses to remain relatively stable on a sequential basis.

Here is what our quantitative model predicts:

Chances of KeyCorp beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter

Earnings ESP: The Earnings ESP for KeyCorp is -0.08%.

Zacks Rank: KeyCorp currently carries a Zacks Rank #3. But we need to have a positive Earnings ESP to be sure of the earnings beat.

KeyCorp Price and EPS Surprise


KeyCorp Price and EPS Surprise | KeyCorp Quote

Notably, the Zacks Consensus Estimate for earnings for the to-be-reported quarter is 48 cents, which reflects a year-over-year improvement of 45.5%. Also, the consensus estimate for sales of $1.64 billion indicates 2.8% growth from the prior-year quarter.

Stocks That Warrant a Look

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in their upcoming releases.

U.S. Bancorp USB is scheduled to release results on Jan 16. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.26%.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation BBT is scheduled to release results on Jan 17. It has an Earnings ESP of +0.32% and a Zacks Rank #3.

M&T Bank Corporation MTB has an Earnings ESP of +0.80% and holds a Zacks Rank #3. It is scheduled to report results on Jan 17.

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