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Will Higher Rates, Loans Aid KeyCorp's (KEY) Q1 Earnings?

Zacks Equity Research

KeyCorp KEY is scheduled to report first-quarter 2019 results on Apr 18, before the opening bell. The company is expected to witness improvement in net interest income (NII), driven by higher interest rates and decent loan growth (mainly in the areas of commercial and industrial, which account for nearly 50% of KeyCorp’s average loan balances).

Moreover, the December 2018 rate hike will have a slight positive impact on the company’s net interest margin (NIM) despite flattening of the yield curve and steadily increasing deposit betas.

The Zacks Consensus Estimate for average total loans of $89.7 billion for the first quarter indicates growth of 3.2% year over year.

Further, backed by loan growth, earning assets are likely to rise. The consensus estimate for average interest earning assets of $127.1 billion for the to-be-reported quarter indicates an increase of 4.4% from the prior-year quarter end.

Hence, KeyCorp’s NII, one of the main revenue sources, is expected to support earnings growth.

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

Non-interest income growth to remain muted: Prolonged government shutdown at the beginning of the quarter and fears of economic slowdown weighed on companies’ plans to raise capital by issuing shares. Further, despite the Fed’s dovish stance on future rate hikes, existing higher interest rates are likely to have slowed down companies’ involvement in debt issuance activities. These are likely to have hurt KeyCorp’s investment banking performance during the first quarter.

Moreover, while dealmakers across the globe were active during the first quarter, global M&A deal volumes witnessed a fall due to higher borrowing costs and several geopolitical concerns. Thus, the company’s advisory fees are likely to be negatively impacted.

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

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 franchise and inorganic growth strategies are expected to keep overall expenses elevated.

Asset quality to support results: The consensus estimate for non-performing assets of $543 million indicates a decline of 4.6% year over year. Likewise, estimates for non-performing loans of $513 million reflect a decrease of 5.2% from the prior-year 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.

Here is what our quantitative model predicts:

Chances of KeyCorp beating the Zacks Consensus Estimate in the first 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 -1.31%.

Zacks Rank: The company currently carries a Zacks Rank #3. While this increases the predictive power of ESP, we need to have a positive Earnings ESP to be sure of an 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 pegged at 42 cents, which reflects a year-over-year improvement of 10.5%. Also, the consensus estimate for sales of $1.60 billion indicates 3.3% growth from the prior-year quarter.

Stocks That Warrant a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat this quarter, per our model.

BankUnited, Inc. BKU has an Earnings ESP of +1.89% and carries a Zacks Rank of 3 at present. The company is slated to release results on Apr 24.

Associated Banc-Corp ASB is expected to release results on Apr 25. It presently has an Earnings ESP of +0.55% and a Zacks Rank #3.

SVB Financial Group SIVB is slated to release results on Apr 25. It has an Earnings ESP of +0.42% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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KeyCorp (KEY) : Free Stock Analysis Report
 
BankUnited, Inc. (BKU) : Free Stock Analysis Report
 
Associated Banc-Corp (ASB) : Free Stock Analysis Report
 
SVB Financial Group (SIVB) : Free Stock Analysis Report
 
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