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Will Loan Growth, Lower Costs Aid KeyCorp (KEY) Q1 Earnings?

Zacks

KeyCorp KEY, slated to announce first-quarter 2018 results on Apr 19, is expected to show improvement in net interest income (NII), driven by higher interest rates. Per the Fed’s latest data, commercial and industrial loans recorded solid growth year over year, even though the quarter witnessed a modest improvement in lending activities.

The Zacks Consensus Estimate for average total loans of $87.2 billion for the first quarter indicates year-over-year growth of 1.3%. Driven by loan growth, earning assets are also likely to rise. The consensus estimate for average interest earning assets of $123.4 billion for the to-be-reported quarter indicates an increase of 3.1%.

Thus, KeyCorp’s NII, one of the main revenue sources, is expected to support earnings growth. The Zacks Consensus Estimate for NII (tax equivalent basis) of $948 million for the to-be-reported quarter reflects 2% increase on a year-over-year basis.

Let’s check out other factors that are expected to influence KeyCorp’s Q1 performance:

Muted non-interest income growth: KeyCorp’s first-quarter non-interest income will benefit from rise in service charge on deposits as deposit balance is expected to improve in the quarter.

However, given lower debt placement activities, investment banking fees are expected to fall. Also, as equity market performance was dismal during the quarter, trust and investment services income is expected to witness a decline.

Further, due to lower mortgage originations, growth in mortgage banking fees will likely be muted during the quarter. Therefore, non-interest income growth is expected to be disappointing.

Notably, management expects fee income to decline sequentially, given the seasonality in loan fees and corporate-owned life insurance as well as normalized levels of investment banking and debt placement fees.

Fall in expenses to lend support: KeyCorp has been diversifying products, reorganizing operations and exiting unprofitable/non-core businesses. Thus, the company’s overall non-interest expenses (excluding merger-related charges) are expected to be manageable.

Also, management will be realizing the majority of remaining $50 million cost savings from the Fist Niagara deal in the first quarter. In fact, KeyCorp anticipates operating expenses to decline sequentially.

Asset quality to aid results: The Zacks Consensus Estimate for non-performing asset of $402 million indicates a plunge of 35.5% year over year. Likewise, the consensus estimate for non-performing loans of $339 million, reflects a decrease of 40.8% from the year-ago quarter.

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

Here is what our quantitative model predicts:

According to our quantitative model, chances of KeyCorp beating the Zacks Consensus Estimate in the first quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to be confident of an earnings surprise call.

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

Zacks ESP: The Earnings ESP for KeyCorp is -0.95%.

Zacks Rank: KeyCorp carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident 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 38 cents, which reflects year-over-year improvement of 18.8%. Further, the Zacks Consensus Estimate for sales of $1.56 billion indicates 4.3% growth from the prior-year quarter.

Stocks That Warrant a Look

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

U.S. Bancorp USB has an Earnings ESP of +0.96% and carries a Zacks Rank of 3. It is scheduled to report results on Apr 18.

The Bank of New York Mellon Corporation BK is slated to release first-quarter results on Apr 19. It has an Earnings ESP of +0.21% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation BBT is slated to report results on Apr 19. It has an Earnings ESP of +1.63% and carries a Zacks Rank #3.

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