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KeyCorp (KEY) Down 2.6% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for KeyCorp (KEY - Free Report) . Shares have lost about 2.6% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

KeyCorp's Q1 Earnings & Revenues Beat Expectations

KeyCorp’s first-quarter 2017 adjusted earnings of $0.32 per share handily surpassed the Zacks Consensus Estimate of $0.28. The figure was up 33.3% from the prior-year quarter.

Better-than-expected results were attributable to revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016) and lower provision for credit losses. However, higher operating expenses were the downside. Notably, the company witnessed a marginal loan growth while deposit balances declined.

Including merger-related charges of $81 million, net income from continuing operations came in at $296 million, up 62.6% from the prior-year quarter.

First Niagara Deal Continues to Drive Revenues, Expenses Rise

Total revenue surged 58% year over year to $1.50 billion. Also, it compared favorably with the Zacks Consensus Estimate of $1.45 billion.

Tax-equivalent net interest income jumped 51.8% year over year to $926 million. The rise was attributable to benefits from the First Niagara acquisition and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 24 bps year over year to 3.13%.

Non-interest income (excluding merger related charges) was $577 million, an increase of 33.9% from the year-ago quarter. A rise in all fee income components drove the surge.

Non-interest expenses (excluding merger related charges) jumped 37.3% year over year to $932 million due to a rise in both personnel as well as non-personnel expenses. Also, the quarter recorded significantly higher merger-related charges.

Loans Rise Marginally, Deposits Decline

At the end of the first quarter, average total deposits were $102.1 billion, down 2.5% from the prior quarter. However, average total loans were $86.1 billion, up 0.9% sequentially.

Improving Credit Quality

Net loan charge-offs, as a percentage of average loans, fell 4 bps year over year to 0.27%. Provision for credit losses declined 29.2% year over year to $63 million.

Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.72%, down 42 bps year over year. However, KeyCorp’s allowance for loan and lease losses was $870 million, up 5.3% from the prior-year quarter.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 8.51% as of Mar 31, 2017, down from 9.97% as of Mar 31, 2016. In addition, Tier 1 risk-based capital ratio was 10.70% versus 11.38% as of Mar 31, 2016.

The company’s estimated Basel III Tier 1 common ratio was 9.87% at the end of the quarter, down from 11.07% as of Mar 31, 2016.

Share Repurchases

During the reported quarter, KeyCorp repurchased $160 million worth of shares as part of its 2016 capital plan.

2017 Outlook

Management expects loan growth to exceed deposit growth with average loans growing in mid-single digit rate from fourth-quarter 2016 level, which translates in to $87–$88 billion. Moreover, average deposits are expected to be in the range of $104–$105 billion.

Further, net interest income is anticipated to increase and be in the range of $3.7–$3.8 billion. This is based on the assumption of one more rate hike in late 2017 and purchase accounting accretion trending lower.

Purchase accounting accretion is expected to decline and come between $180-190 million, down 20% from the fourth quarter 2016.

Net interest margin is expected to be stable reflecting the combined effect of lower purchase accounting accretion and higher yields.

Non-interest income is expected to be in $2.3-$2.4 billion range, as the company continues to drive growth from its core businesses and the acquisition.

KeyCorp expects operating expenses (excluding merger-related charges) to be in the range of $3.65-$3.75 billion.

Further, cost savings (related to the First Niagara deal) of $450 million are anticipated to be reached by early-2018. Notably, having already achieved 85% of $400 million in first-quarter 2017 cost savings target, the remaining is projected to be achieved by second-quarter 2017.

Given the increase in cost savings target from the First Niagara deal, management expects a proportional rise in merger related charges from original projection of $550 million.

Management expects the First Niagara deal to result in earnings accretion of approximately 5% in 2017. Also, management projects achieving $300 million worth of incremental revenues from synergies generated by the acquisition. This is likely to lower the company’s cash efficiency by 3% and improve return on tangible common equity by 2%.

Net charge-offs are anticipated to stay below the target range of 40-60 bps. However, the company expects relatively higher provisions.

The effective tax rate (GAAP basis) is likely to increase to 25-27%.

The company expects second quarter 2017 preferred dividend to amount to roughly $14 million.

Thus, over the long term, management expects to continue to generate positive operating leverage, lower the cash efficiency ratio to below 60% and produce a return on tangible common equity of 13% or 15%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter, while looking back an additional 30 days, we can see even more upward momentum. There have been eight moves higher compared to one lower two months ago. In the past month, the consensus estimate has shifted by 5.1% due to these changes.

KeyCorp Price and Consensus

 

KeyCorp Price and Consensus | KeyCorp Quote

VGM Scores

At this time, KeyCorp's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'B'. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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