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Is an Earnings Beat Likely for KeyCorp (KEY) Stock in Q4?

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We expect KeyCorp (KEY - Free Report) to beat earnings expectations when it reports fourth-quarter 2016 and full-year results on Jan 19, before the opening bell.

Last quarter, revenue synergies from the First Niagara deal (completed in Aug 2016) helped KeyCorp’s earnings outpace the Zacks Consensus Estimate. Further, the company reported impressive growth in loans and deposits. However, higher operating expenses and a rise in provision for credit losses were headwinds.

The earnings beat was followed by a rise of over 50% in the company’s share price in the three months ended Dec 31, 2016. However, analysts don’t seem to be too optimistic about KeyCorp’s prospects as the company’s earnings estimates have remained stable over the past 30 days.

Notably, the Zacks Consensus Estimate of 29 cents for the fourth quarter represents year-over-year growth of 5.2%.

However, KeyCorp does not have a very impressive earnings surprise history, as evident from the chart below:

KeyCorp Price and EPS Surprise
 

Why a Likely Positive Surprise?

Before we go into a detailed discussion about the factors that are likely to influence the results, let’s check what our quantitative model predicts.

According to our quantitative model, the chances of KeyCorp beating the Zacks Consensus Estimate in the fourth quarter are very high. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

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 +6.90%. This is because the Most Accurate estimate of 31 cents is above the Zacks Consensus Estimate of 29 cents.

Zacks Rank: KeyCorp currently carries a Zacks Rank #2 (Buy).

The combination of KeyCorp’s Zacks Rank #2 and positive ESP makes us reasonably confident of an earnings beat in the upcoming release.

Factors to Impact Q4 Results

Let us see how things have shaped up for KeyCorp for this announcement.

Net Interest Income (NII) to be Driven by Loan Growth: Management expects NII to be driven by the positive impact of the First Niagara deal, along with an anticipated adjustment in purchase account accretion.

Further, the full-quarter impact of deal is expected to lead to a rise in average loans. Also, driven by strength in the commercial business, the company expects growth in the core portfolio loans. Thus, we are of the opinion that improved loans will lead to an increase in NII in the quarter.

Marginal Increase in Non-Interest Income: KeyCorp expects the First Niagara deal to have a positive impact on its non-interest income. Moreover, investment banking and debt placement fees for 2016 are expected to be unchanged to or slightly higher on a year-over-year basis.

Expenses to Rise Slightly: KeyCorp has been consistently streamlining operations, diversifying products and exiting unprofitable/non-core businesses, which should keep expenses (excluding merger related charges) stable on a year-over-year basis.

However, management is of the opinion that despite the cost-saving initiatives, the company’s string of acquisitions will keep merger-related charges elevated in the fourth quarter. This in turn will lead to an increase in overall expenses.

Asset Quality to Support Results: KeyCorp’s sustained loan growth is likely to keep provisions on the higher side. Despite the marginal increase, the company’s overall credit quality is anticipated to reflect an improvement in the upcoming release.

Other Stocks to Consider

Here are a few other finance 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:

Citigroup Inc. (C - Free Report) has an Earnings ESP of +1.79% and a Zacks Rank #2. It is scheduled to report results on Jan 18.

Citizens Financial Group, Inc. (CFG - Free Report) is slated to release results on Jan 20. It has an Earnings ESP of +3.85% and a Zacks Rank #2.

Fifth Third Bancorp (FITB - Free Report) is slated to release results on Jan 24. It has an Earnings ESP of +2.33% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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