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Will KeyCorp (KEY) Disappoint Yet Again in Q3 Earnings?

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KeyCorp. (KEY - Free Report) is scheduled to report third-quarter 2016 results on Oct 25, before the opening bell.

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

Nonetheless, the earnings miss was followed by a rise of nearly 11% in the company’s share price during the three months ended Sep 30, 2016. However, analysts don’t seem to be happy with KeyCorp’s business activities in the just concluded quarter.

The company witnessed four downward revisions in earnings estimates (versus one upward revision) over the last 30 days. Notably, the Zacks Consensus Estimate has remained stable for the last seven days.

Nevertheless, 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

Earnings Whispers

Our proven model indicates that chances of KeyCorp beating the Zacks Consensus Estimate in the third quarter is 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 0.00%. This is because the Most Accurate estimate of 26 cents stands at par with the Zacks Consensus Estimate.

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.

Factors to Impact Q3 Results

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.

Dull Non-Interest Income Performance: KeyCorp’s non-interest income should remain relatively stable or witness a slight growth during the quarter, due to weakness in merger and acquisition advisory revenues, and initial public offering (IPO) levels. Nonetheless, the company is expected to have observed good overall growth in investment banking and debt placement fees, in line with the original outlook for the business.

Stable Expenses: Expenses (excluding merger-related charges) should remain stable on a year-over-year basis as the company has been consistently streamlining operations, diversifying products and exiting unprofitable/non-core businesses.

Also, management expects to report a positive operating leverage despite persistent headwinds from the low interest rate environment and challenging market conditions.

Loan Growth to Support Revenues: Given the strength in commercial businesses, management expects loans to grow in the quarter. This, in turn, will lead to a marginal improvement in net interest income, which is anticipated to have grown both sequentially and on a year-over-year basis.

NIM to Improve: KeyCorp’s net interest margin should have increased during the quarter due to lower excess liquidity, which would have been used in conjunction with the First Niagara deal.

Asset Quality to Support Results: Although KeyCorp’s provisions for loan losses are expected to be on the higher side, due to the company’s sustained loan growth, the overall credit quality is anticipated to reflect improvement in the upcoming release.

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:

Raymond James Financial, Inc. (RJF - Free Report) is slated to release its results on Oct 26. The company has an Earnings ESP of +2.04% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks Rank #1 stocks here.

State Street Corporation (STT - Free Report) is scheduled to report results on Oct 26. The company has an Earnings ESP of +0.80% and carries a Zacks Rank #2.

Lazard Ltd. (LAZ - Free Report) is scheduled to report its results on Oct 27.It has an Earnings ESP of +3.90% and carries a Zacks Rank #2.

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