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KeyCorp (KEY) Q3 Earnings In Line, Revenues & Expenses Rise

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KeyCorp’s (KEY - Free Report) third-quarter 2017 adjusted earnings of 35 cents per share were in line with the Zacks Consensus Estimate. Also, this compares favorably with 30 cents recorded in the prior-year quarter.

Results were supported by revenue synergies from the First Niagara Financial Group acquisition deal (completed in August 2016) and higher interest rates. Further, lower credit cost, an increase in fee income, and improving loans and deposits were the tailwinds. On the other hand, higher operating expenses were on the downside.

Including merger-related charges and a merchant services gain adjustment, net income from continuing operations came in at $349 million or 32 cents per share. This was up significantly from $165 million or 16 cents per share in the prior-year quarter.

First Niagara Deal, Higher Rates Drive Revenues, Expenses Rise

Total revenuesgrew 16.2% year over year to $1.55 billion. However, it was slightly below the Zacks Consensus Estimate of $1.56 billion.

Tax-equivalent net interest income jumped 22.1% year over year to $962 million. The rise was attributable to benefits from the First Niagara acquisition and a rise in earning asset yields. Also, taxable-equivalent net interest margin from continuing operations grew 30 basis points (bps) year over year to 3.15%.

Non-interest income was $592 million, an increase of 7.8% from the year-ago quarter. A rise in all fee income components,except Investment banking and debt placement fees, and net gains from principal investing, drove the increase.

Non-interest expenses (excluding merger related charges) rose 7.1% year over year to $956 million. The increase reflected a full-quarter impact of the First Niagara acquisition, ongoing business investments and recent acquisitions, partially offset by merger cost savings.

Loans & Deposits Rise Marginally

At the end of the third quarter, average total deposits were $103.1 billion, up 0.3% from the prior quarter. However, average total loans were $86.8 billion, up 0.4% sequentially.

Credit Quality: A Mixed Bag

Net loan charge-offs, as a percentage of average loans, decreased 8 bps year over year to 0.15%. Provision for credit losses declined13.6% year over year to $51 million.

Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.64%, down 25 bps year over year.

However, KeyCorp’s allowance for loan and lease losses was $880 million, up 1.7% from the prior-year quarter.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 8.49% as of Sep 30, 2017, up from 8.27% as of Sep 30, 2016. In addition, Tier 1 risk-based capital ratio was 11.11% versus 10.53% as of Sep 30, 2016.

The company’s estimated Basel III Tier 1 common ratio was 10.26% at the end of the quarter, up from 9.56% as of Sep 30, 2016.

Share Repurchases

During the reported quarter, KeyCorp repurchased $277 million worth of shares as part of its 2017 capital plan.

Our Take

KeyCorp remains well positioned to benefit from rising rate environment, increase in loan and deposit balances and improving economic stability. However, persistently increasing expenses owing to investments in franchise and inorganic growth strategy are likely to hurt its bottom line. Also, significant exposure toward real estate loans continues to be a major concern.

KeyCorp Price, Consensus and EPS Surprise

 

KeyCorp Price, Consensus and EPS Surprise | KeyCorp Quote

Keycorp currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of other Banks and Upcoming Release

First Horizon National Corporation (FHN - Free Report) reported third-quarter 2017 adjusted earnings per share of 32 cents, surpassing the Zacks Consensus Estimate by 6.7%. Improvement in net interest income, loans and no provision for loan losses supported the results. However, higher expenses and fall in non-interest income were the undermining factors.

Comerica Inc.’s (CMA - Free Report) adjusted earnings per share of $1.27 surpassed the Zacks Consensus Estimate of $1.20.  Results reflected increase in revenues supported by easing margin pressure and higher fee income. Also, the company was successful in reducing expenses on the back of its GEAR Up initiative. However, higher provisions and a fall in loans balance remained major headwinds.

SunTrust Banks, Inc. (STI - Free Report) is scheduled to report earnings on Oct 20.

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