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KeyCorp (KEY) Up 1.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for KeyCorp (KEY). Shares have added about 1.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KeyCorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

KeyCorp Beats on Q3 Earnings as Revenues Improve

KeyCorp’s third-quarter 2018 earnings of 45 cents per share surpassed the Zacks Consensus Estimate of 44 cents. Also, the figure compared favorably with earnings of 32 cents recorded in the prior-year quarter.

Improvement in net interest income and fee income drove results. Further, a decline in expenses was a tailwind. However, higher provision for credit losses was an undermining factor.

Net income from continuing operations was $468 million, up 34.1% from the prior-year quarter.

Revenues Improve, Expenses Decline

Total revenues were up 3.1% year over year to $1.60 billion. However, the figure lagged the Zacks Consensus Estimate of $1.63 billion.

Tax-equivalent net interest income (NII) increased 3.2% year over year to $993 million. This included $26 million of purchase accounting accretion (PAA).

Also, taxable-equivalent NIM from continuing operations increased 3 basis points (bps) year over year to 3.18%.

Non-interest income was $609 million, reflecting an increase of 2.9% from the year-ago quarter. The rise was mainly driven by higher operating lease income and other leasing gains, and higher consumer mortgage income.

Non-interest expenses decreased 2.8% year over year to $964 million. The decline was driven by a fall in both personnel costs and non-personnel expenses.

Strong Balance Sheet

At the end of the third quarter, average total deposits were $105.63 billion, up 1.6% from the prior quarter. Average total loans were $88.47 billion, down marginally on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, increased 12 bps year over year to 0.27%. Provision for credit losses increased 21.6% to $62 million.

Further, KeyCorp’s allowance for loan and lease losses was $887 million, up marginally from the prior-year quarter. Also, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.75%, up 11 bps year over year.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 8.05% as of Sep 30, 2018, down from 8.49% as of Sep 30, 2017. Also, Tier 1 risk-based capital ratio was 11.09%, down from 11.11% as of Sep 30, 2017.

The company’s estimated Basel III Common Equity Tier 1 ratio was 9.93% at the end of the quarter.

Share Repurchases

During the reported quarter, KeyCorp repurchased $542 million worth of shares as part of its 2018 capital plan.

Fourth-Quarter 2018 Outlook

Management expects average loans to increase in the low single digits range, sequentially. Average deposits are expected to be in line with the third quarter level.

Further, NII (FTE basis) is anticipated to increase in the low single digits.

Non-interest income is expected to rise in the mid-single digits range, sequentially.

The company expects non-interest expenses to be stable, sequentially.

Net charge-offs are anticipated to remain stable on a sequential basis.

The effective tax rate (GAAP basis) is likely to be 16-17%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, KeyCorp has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.


Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, KeyCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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