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KeyCorp (KEY) Q4 Earnings Top as Revenues Rise, Costs Fall

Zacks Equity Research

KeyCorp’s KEY fourth-quarter 2018 adjusted earnings of 48 cents per share surpassed the Zacks Consensus Estimate by a penny. Also, the figure compared favorably with earnings of 36 cents recorded in the prior-year quarter.

Improvement in net interest income and a decline in expenses drove the results. Further, loans and deposits witnessed growth and capital ratios improved. However, higher provision for credit losses and a decrease in fee income were the undermining factors.

After taking into consideration certain non-recurring items, net income from continuing operations was $459 million or 45 cents per share, up from $181 million or 17 cents per share in the prior-year quarter.

In 2018, earnings of $1.70 per share increased 51.7% year over year. Net income from continuing operations (GAAP basis) was $1.79 billion, up 47.1% from the prior year.

Revenues Improve, Expenses Decline

Total revenues were up 2.8% year over year to $1.65 billion. Also, the figure beat the Zacks Consensus Estimate of $1.63 billion.

In 2018, total revenues were $6.46 billion, up 2.3% year over year. However, the figure surpassed the Zacks Consensus Estimate of $6.41 billion.

Tax-equivalent net interest income increased 5.9% year over year to $1 billion. This included $23 million of purchase accounting accretion.

Also, taxable-equivalent net interest margin from continuing operations increased 7 basis points (bps) year over year to 3.16%.

Non-interest income was $645 million, reflecting a fall of 1.7% from the year-ago quarter. The decline was mainly due to lower cards and payments income, trust and investment services income and investment banking and debt placement fees.

Non-interest expenses decreased 7.8% year over year to $1.01 billion. The decline was due to a fall in both personnel costs and non-personnel expenses.

Loans & Deposits Rise

At the end of the fourth quarter, average total deposits were $108 billion, up 2.2% from the prior quarter. Average total loans were $89.3 billion, up nearly 1% on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.27%. Provision for credit losses increased 20.4% to $59 million.

Further, KeyCorp’s allowance for loan and lease losses was $883 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 0.64%, up 2 bps year over year.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 8.30% as of Dec 31, 2018, up from 8.23% as of Dec 31, 2017. Also, Tier 1 risk-based capital ratio was 11.07%, up from 11.01% as of Dec 31, 2017.

The company’s estimated Basel III Common Equity Tier 1 ratio was 9.92% at the end of the quarter.

Share Repurchases

During the reported quarter, KeyCorp repurchased $278 million worth of shares as part of its 2018 capital plan.

Our Take

KeyCorp remains well positioned for revenue growth, given the rise in interest rates and improving loan and deposit balances. Further, the company’s efforts to improve fee income are commendable. However, persistently increasing expenses, owing to investments in franchise and acquisitions, are likely to curb bottom-line growth. Further, the company's significant exposure to risky loan portfolios remains a major concern.

KeyCorp Price, Consensus and EPS Surprise

KeyCorp Price, Consensus and EPS Surprise | KeyCorp Quote

KeyCorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Comerica’s CMA fourth-quarter 2018 earnings per share of $1.88 surpassed the Zacks Consensus Estimate of $1.86. Also, the results compared favorably with year-ago adjusted figure of $1.24.  

PNC Financial PNC reported fourth-quarter 2018 earnings per share of $2.75, which lagged the Zacks Consensus Estimate of $2.77. However, the bottom line reflected a 20.1% jump from the prior-year quarter, on an adjusted basis.

Riding on higher revenues, U.S. Bancorp’s USB fourth-quarter 2018 adjusted earnings per share of $1.07 outpaced the Zacks Consensus Estimate by a penny. Results were also up 10.3% from the prior-year quarter.

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