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KeyCorp (KEY) Q2 Earnings & Revenues Beat, Provisions Rise

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KeyCorp’s (KEY - Free Report) second-quarter 2020 earnings of 16 cents per share surpassed the Zacks Consensus Estimate by a penny. However, the figure compares unfavorably with 40 cents earned in the prior-year quarter.

The company’s shares have gained almost 3% in pre-market trading, indicating that investors have taken the results in their stride. A better picture is likely to emerge following the full day’s trading session.

The results benefited from a rise in revenues, slight decline in operating expenses, and higher loan and deposit balances. However, lower rates and significantly higher provisions were the undermining factors.

Net income from continuing operations was $159 million, down 60.5% year over year.

Revenues & Loan Balance Rise, Expenses Decline

Total revenues grew 6.6% year over year to $1.72 billion. Also, the figure beat the Zacks Consensus Estimate of $1.60 billion.

Tax-equivalent net interest income increased 3.6% on a year-over-year basis to $1.03 billion. The rise was attributed to higher earning asset balances, partially offset by lower net interest margin (NIM).

Taxable-equivalent NIM from continuing operations decreased 30 basis points (bps) year over year to 2.76%.

Non-interest income was $692 million, increasing 11.3% year over year. The rise was primarily due to substantial growth in consumer mortgage income.

Non-interest expenses declined marginally from the prior year to $1.01 billion. The decrease largely reflects the implementation of the company’s expense initiatives, partially offset by costs from the Laurel Road acquisition.

At second quarter-end, average total deposits were $128 billion, up 16% from the prior quarter. Average total loans were $107.9 billion, up 12.2% on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, grew 7 bps year over year to 0.36%. Also, provision for credit losses surged substantially from the year-ago quarter to $482 million. The rise primarily reflected the significant change in the economic scenario amid the coronavirus pandemic. 

KeyCorp’s allowance for loan and lease losses was $1.71 billion, surging 91.9% from the prior-year quarter. Also, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.89%, up 23 bps.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 7.6% as of Jun 30, 2020, down from 8.6% in the corresponding period of 2019. Also, Tier 1 risk-based capital ratio was 10.4%, down from 11.0% in the comparable prior-year period.

Our Take

Solid loan growth is expected to support KeyCorp’s revenues amid low rates. However, deteriorating asset quality and economic slowdown remain major near-term concerns.

KeyCorp Price, Consensus and EPS Surprise

KeyCorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

PNC Financial (PNC - Free Report) , currently carrying a Zacks Rank #4 (Sell), reported second-quarter 2020 loss from continuing operations of $1.90 per share against earnings of $2.47 reported in the prior-year quarter. The Zacks Consensus Estimate was pegged at earnings of 88 cents per share.

Zacks #3 Ranked Truist Financial’s (TFC - Free Report) second-quarter 2020 adjusted earnings of 82 cents per share surpassed the Zacks Consensus Estimate of 64 cents. The results excluded restructuring charges and BB&T-SunTrust Banks merger-related charges, incremental operating expenses related to the merger, securities gains, as well as losses from the early extinguishment of long-term debt.

First Republic Bank (FRC - Free Report) , also a #3 Ranked stock, delivered an earnings surprise of 16.7% in second-quarter 2020 aided by top-line strength. Earnings per share of $1.40 surpassed the Zacks Consensus Estimate of $1.20. Additionally, the bottom line climbed 12.9% from the year-ago quarter.

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