KeyCorp. (KEY Quick QuoteKEY - Free Report) is scheduled to report second-quarter 2016 results on Jul 26, before the opening bell.

Last quarter, a significant rise in provision for loan losses, higher operating expenses and a decline in non-interest income resulted in KeyCorp missing the Zacks Consensus Estimate. However, a rise in net interest income acted as a tailwind.

The earnings miss was followed by the stock’s lackluster performance during the three-month period ended Jun 30, 2016. Also, analysts don’t seem to be happy with KeyCorp’s business activities in the just concluded quarter.

The company witnessed five downward revisions in earnings estimates (versus one upward revision) over the last 30 days. Notably, the Zacks Consensus Estimate of 28 cents remained stable over the last 7 days.

Nonetheless, KeyCorp boasts a decent earnings surprise history, as evident from the chart below:

KEYCORP NEW Price and EPS Surprise

KEYCORP NEW Price and EPS Surprise | KEYCORP NEW Quote

Will KeyCorp be able to beat estimates this earnings season or will it disappoint yet again? Let us see how things have shaped up for this announcement.

Factors to Impact Q2 Results

NIM to Remain under Pressure: As the Fed hasn’t raised interest rates so far this year, KeyCorp’s  margins are likely to be dampened. Notably, net interest margin for the company had declined in the first quarter. We expect  to see this trend in the second quarter as well.

Expenses to Rise Driven by Inorganic Growth: KeyCorp’s deal to acquire First Niagara Financial Group Inc. should lead to a modest rise in operating expenses. While the company has guided for a relatively stable expense base, we believe the same to be on the higher side in the second quarter.

Lackluster Non-interest Income Performance: Driven by impressive trading activities during the quarter, we expect KeyCorp to witness a slight increase in trading income. Further, debt-placement fees will likely rise. However, these are likely to be more than offset by lower mortgage production related income (lower level of refinancing activities) and investment banking revenues (as reflected by adverse industry-wide trends).

Loan Growth to Support Revenues: Given the strength in commercial businesses, management expects loans to grow in the quarter. So, this in turn, will lead to a marginal improvement in the top line.

Asset Quality to Support Results: KeyCorp’s provision for loan losses is expected to be on the higher side, although overall credit quality is anticipated to reflect improvement in the upcoming release.

Earnings Whispers

Our proven model indicates that chances of KeyCorp beating the Zacks Consensus Estimate in the second quarter are quite low. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for KeyCorp is -3.57%. This is because the Most Accurate estimate of 27 cents stands below the Zacks Consensus Estimate of 28 cents.

Zacks Rank: KeyCorp’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP, making us less confident of an earnings surprise call. Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few finance industry stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

LPL Financial Holdings Inc. (LPLA Quick QuoteLPLA - Free Report) , which is expected to report on Jul 28, has an Earnings ESP of +2.33% and a Zacks Rank #3.

Federated Investors, Inc. has an Earnings ESP of +2.13% and a Zacks Rank #3. The company is slated to release results on Jul 28.

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