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Muted Loan Growth, Low Rates to Hurt KeyCorp (KEY) Q4 Earnings

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KeyCorp (KEY - Free Report) is slated to announce fourth-quarter and 2020 results on Jan 21, before the opening bell. Notably, during the to-be-reported quarter, the overall lending scenario remained weak because of the pandemic-related scare. Specifically, commercial and industrial loan balances (accounting for roughly 50% of KeyCorp’s average loan balances) witnessed a considerable decline during the quarter.

Moreover, the Zacks Consensus Estimate for KeyCorp’s average total loans for the fourth quarter is pegged at $103 billion, indicating a decline of 1.8% on a sequential basis. Also, the consensus estimate for average earning assets of $154.3 billion suggests only a marginal increase from the prior quarter’s reported number.

Further, management expects average loans to be down in the low-single-digit rate in the fourth quarter on a sequential basis, reflecting consumer loan growth and lower commercial line utilization. Moreover, deposits are expected to have remained stable sequentially and deposit costs are expected to decline 6-9 basis points (bps).

Thus, owing to muted loan growth along with near-zero interest rates, KeyCorp’s net interest income (NII) is expected to have been negatively impacted in the quarter. The Zacks Consensus Estimate for NII (fully tax-equivalent basis) of $1.01 billion indicates only a marginal rise from the prior quarter.

Nevertheless, management expects fourth-quarter NII to include $20-$25 million from the repayment of paycheque protection program (PPP) loans. Also, the company expects NII to be up in low-single digits from the previous quarter, on the expectation of a relatively stable net interest margin (NIM).

Other Key Factors at Play

Non-interest Income: Deal making continued at a fast pace in fourth-quarter 2020 as economic and business activities resumed globally. Also, IPO activities continued to rise. Further, a rise was witnessed in equity and debt issuances. These are expected to have provided support to KeyCorp’s investment banking business in the quarter. Also, given the continued rise in market volatility along with higher client activities, trading income is likely to have improved. The consensus estimate for KeyCorp’s investment banking and capital markets income is pegged at $172 million, which indicates a rise of 17.8% sequentially.

Likewise, historically-low mortgage rates continued to fuel demand for new mortgages in the fourth quarter. As the stay-at-home orders were lifted and the economy gained traction, a substantial rise in originations was witnessed. Also, higher refinancing activities were witnessed. Thus, the company’s mortgage business is likely to have been positively impacted. The Zacks Consensus Estimate for mortgage servicing fees is pegged at $18 million, suggesting no change from the previous quarter.

Notably, the Zacks Consensus Estimate for trust and investment services income of $127 million suggests a marginal decline from the prior quarter.

Thus, the consensus estimate for total non-interest income of $696 million indicates a rise of 2.2% on a sequential basis. Management anticipates non-interest income to be relatively stable sequentially, reflecting an expected decline in consumer mortgage offset by growth in investment banking and debt placement fees.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses helped it in saving costs in the past. The trend is expected to have continued in the fourth quarter.

The company expects non-interest expenses to be down in low-single digits sequentially.

Asset Quality: Given that KeyCorp already built additional loan loss reserves in the first half of the year due to the pandemic-induced crisis, provisions are not expected to have risen significantly in the fourth quarter.

However, the consensus estimate for non-performing loans of $1.08 billion suggests a 30% rise on a sequential basis.

Management anticipates net charge-offs to be at the lower end of 55-65 bps.

What the Zacks Model Unveils

Our proven model shows that KeyCorp has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for KeyCorp is +3.19%.

Zacks Rank: The company currently carries a Zacks Rank #3.

The Zacks Consensus Estimate for KeyCorp’s fourth-quarter earnings is pegged at 43 cents per share, which suggests a 10.4% decline from the prior-year quarter’s reported number. The estimated figure has been revised 2.4% upward over the past 30 days.

The consensus estimate for sales of $1.71 billion indicates 5% growth from the year-ago quarter.

KeyCorp Price and EPS Surprise


KeyCorp Price and EPS Surprise

KeyCorp price-eps-surprise | KeyCorp Quote

Other Stocks Worth a Look

Here are some other finance stocks that you may want to consider as these too have the right combination of elements to post an earnings beat this earnings season.

The Earnings ESP for Commerce Bancshares, Inc. (CBSH - Free Report) is +0.99% and it carries a Zacks Rank #3, currently. The company is scheduled to report quarterly numbers on Jan 20.

BankUnited, Inc. (BKU - Free Report) is slated to release earnings figures on Jan 21. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +2.46%.

Capital One Financial Corporation (COF - Free Report) is slated to release earnings figures on Jan 26. The company currently carries a Zacks Rank #2 and has an Earnings ESP of +3.50%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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