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KeyCorp (KEY - Free Report) is a diversified consumer and commercial bank that is expected to see its earnings decline this year. KEY’s negative earnings revisions also help it earn a Zacks Rank #5 (Strong Sell).
KeyCorp offers a variety of products and services. These include consumer services like deposits, lending, and investments to individuals, and small and medium-sized businesses. It also operates a full-fledged investment bank on the commercial side offering debt and equity capital markets, equipment finance, commercial mortgage banking and other services to middle market firms.
KeyCorp stock has markedly underperformed both the industry and broad market YTD. As a regional bank, it has been caught up in the banking crisis drama that was centered around Silicon Valley Bank and the stock has yet to recover.
KEY has several concerning headwinds: Analysts unanimously downgrading earnings expectations, poor Q4 earnings results, and large exposure to the struggling commercial real estate loan market.
Image Source: Zacks Investment Research
KeyCorp Q4 Earnings Lag Estimates
KeyCorp had an unimpressive Q4 earnings report. Earnings for the quarter came in at $0.38 per share, which missed analyst estimates of $0.55 per share by -31%. This figure also represented a -40% decline in profits YoY.
KEY experienced strong growth in Net Interest Income thanks to the rally in interest rates, but those profits were more than offset by ballooning operating expenses. Investments in technology, and inflationary pressures have kept expenses high and growing.
Earnings Expectations
Analysts don’t have strong expectations for KEY earnings and had been revising estimates lower since before the banking crisis in mid-March. Analysts are in complete agreement with downgrading expectations. Earnings estimates have been lowered by as much as -24% over the last two months.
Image Source: Zacks Investment Research
Exposure to Commercial Real Estate Loans
It’s no secret that the commercial real estate market is under pressure. With the transition to work from home destroying the office building values, to now falling residential home prices in many US geographies, the bad news is beginning to mount.
Following the Covid-19 pandemic there was a boom in both residential and commercial real estate purchases. However, many booms are followed by busts and the cracks are clearly beginning to form.
Commercial real estate giants like Vornado Realty Trust (VNO - Free Report) , the largest commercial real estate owner in NYC, are down bad. VNO shares are down nearly -90% from their peak.
Notable investor Howard Marks of Oak Tree Capital doesn’t think the pain is over either. In an interview on Tuesday, Marks stated "We're very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk."
He also said that "The possibility of a recession bodes ill for rental rates and occupancy, and thus for landlords' income."
Also on Tuesday, Brookfield Asset Management (BAM - Free Report) announced that they would default on a $161 million mortgage tied to a dozen office buildings in Washington DC. The debt was underwritten in 2018, and the floating-rate mortgage payments more than doubled in the last year because of the jump in interest rates.
KeyCorp commercial real estate loan exposure currently sits at 16% of total loans. Fortunately, this isn’t nearly as much as some other regional banks such as Valley National VLY with 60%, or New York Community Bancorp NYCB with 71% exposure.
Nonetheless, it isn’t a promising development.
Valuation
KeyCorp is trading at a one-year forward earnings multiple of 7x, which is below the industry average of 9x, and below its five-year median of 10x. KEY also offers a hefty dividend yield of 6.8%, which it has raised an average of 3.5% annually over the last three years.
Image Source: Zacks Investment Research
Bottom Line
While KeyCorp is currently trading at a reasonable valuation and offers an appealing dividend yield there is still too much idiosyncratic risk associated with the stock and sector more broadly. Regional Banks sit in the bottom 20% of the Zacks Industry rank, and the Finance sector is at the very bottom of the Sector rank.
With falling earnings, macroeconomic risk, and poor earnings expectations, KeyCorp is definitely a stock investors should steer clear of.
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Bear of the Day: KeyCorp (KEY)
KeyCorp (KEY - Free Report) is a diversified consumer and commercial bank that is expected to see its earnings decline this year. KEY’s negative earnings revisions also help it earn a Zacks Rank #5 (Strong Sell).
KeyCorp offers a variety of products and services. These include consumer services like deposits, lending, and investments to individuals, and small and medium-sized businesses. It also operates a full-fledged investment bank on the commercial side offering debt and equity capital markets, equipment finance, commercial mortgage banking and other services to middle market firms.
KeyCorp stock has markedly underperformed both the industry and broad market YTD. As a regional bank, it has been caught up in the banking crisis drama that was centered around Silicon Valley Bank and the stock has yet to recover.
KEY has several concerning headwinds: Analysts unanimously downgrading earnings expectations, poor Q4 earnings results, and large exposure to the struggling commercial real estate loan market.
Image Source: Zacks Investment Research
KeyCorp Q4 Earnings Lag Estimates
KeyCorp had an unimpressive Q4 earnings report. Earnings for the quarter came in at $0.38 per share, which missed analyst estimates of $0.55 per share by -31%. This figure also represented a -40% decline in profits YoY.
KEY experienced strong growth in Net Interest Income thanks to the rally in interest rates, but those profits were more than offset by ballooning operating expenses. Investments in technology, and inflationary pressures have kept expenses high and growing.
Earnings Expectations
Analysts don’t have strong expectations for KEY earnings and had been revising estimates lower since before the banking crisis in mid-March. Analysts are in complete agreement with downgrading expectations. Earnings estimates have been lowered by as much as -24% over the last two months.
Image Source: Zacks Investment Research
Exposure to Commercial Real Estate Loans
It’s no secret that the commercial real estate market is under pressure. With the transition to work from home destroying the office building values, to now falling residential home prices in many US geographies, the bad news is beginning to mount.
Following the Covid-19 pandemic there was a boom in both residential and commercial real estate purchases. However, many booms are followed by busts and the cracks are clearly beginning to form.
Commercial real estate giants like Vornado Realty Trust (VNO - Free Report) , the largest commercial real estate owner in NYC, are down bad. VNO shares are down nearly -90% from their peak.
Notable investor Howard Marks of Oak Tree Capital doesn’t think the pain is over either. In an interview on Tuesday, Marks stated "We're very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk."
He also said that "The possibility of a recession bodes ill for rental rates and occupancy, and thus for landlords' income."
Also on Tuesday, Brookfield Asset Management (BAM - Free Report) announced that they would default on a $161 million mortgage tied to a dozen office buildings in Washington DC. The debt was underwritten in 2018, and the floating-rate mortgage payments more than doubled in the last year because of the jump in interest rates.
KeyCorp commercial real estate loan exposure currently sits at 16% of total loans. Fortunately, this isn’t nearly as much as some other regional banks such as Valley National VLY with 60%, or New York Community Bancorp NYCB with 71% exposure.
Nonetheless, it isn’t a promising development.
Valuation
KeyCorp is trading at a one-year forward earnings multiple of 7x, which is below the industry average of 9x, and below its five-year median of 10x. KEY also offers a hefty dividend yield of 6.8%, which it has raised an average of 3.5% annually over the last three years.
Image Source: Zacks Investment Research
Bottom Line
While KeyCorp is currently trading at a reasonable valuation and offers an appealing dividend yield there is still too much idiosyncratic risk associated with the stock and sector more broadly. Regional Banks sit in the bottom 20% of the Zacks Industry rank, and the Finance sector is at the very bottom of the Sector rank.
With falling earnings, macroeconomic risk, and poor earnings expectations, KeyCorp is definitely a stock investors should steer clear of.