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Loan Growth, IB to Aid KeyCorp (KEY) Q4 Earnings Amid Low Rates

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KeyCorp (KEY - Free Report) is scheduled to announce fourth-quarter and 2021 results on Jan 20, before the opening bell. The overall lending scenario was impressive in the to-be-reported quarter.

Per the Federal Reserve’s latest data, consumer loans, which account for almost 30% of KeyCorp’s average loan balances, recorded a rise in the quarter. Also, unlike the prior few quarters, commercial and industrial loan balances (accounting for almost 50% of KEY’s average loan balances) witnessed an increase.

KeyCorp also expected fourth-quarter 2021 to witness a rise in both core commercial and consumer loans. Management projected average loan balances for the to-be-reported quarter to be up in the low-single digits on a sequential basis.

However, the Zacks Consensus Estimate for the company’s fourth-quarter average earning assets is pegged at $169 billion, suggesting a sequential fall of 7.1%.

Thus, despite robust growth in loans, KeyCorp’s interest income is not expected to have witnessed much improvement due to the continued low interest rate environment. The consensus estimate for net interest income (NII) (on a fully tax-equivalent basis) is $1.01 billion, indicating a decline of 1.2% from the previous quarter’s reported number.

The company expects tax-equivalent NII (including ongoing participation in paycheck protection program or PPP and the impact of the auto loan sale) to be down sequentially in the low-single digits, suggesting a lower PPP forgiveness.

NIM is projected to continue to reflect the impacts of excess liquidity on KEY’s balance sheet.

Other Factors at Play

Non-Interest Income: Like the past several quarters, deal-making continued at a robust pace in fourth-quarter 2021, with both deal volume and value witnessing significant growth. This was primarily driven by the resumption of normal business activities, excess liquidity levels, companies’ appetite for strengthening scale and market share, and the solid economic recovery.

Likewise, continued momentum in the IPO market and a steady rise in follow-up equity issuances are expected to have offered support to the company’s equity underwriting fees in the quarter. Bond issuance volumes were modest. Thus, KeyCorp’s investment banking (IB) business performance is expected to have been impressive in the to-be-reported quarter.

While trading activities normalized in the quarter compared with the prior-year period, it remained decent compared with the third quarter of 2021. The consensus estimate for KeyCorp’s IB and capital markets income for the fourth quarter is pegged at $241 million, which indicates an increase of 2.6% sequentially.

The consensus estimate for service charge on deposits of $91 million indicates no change from the previous quarter.

The Zacks Consensus Estimate for trust and investment services income of $130 million suggests a modest rise from the prior quarter. However, the consensus estimate for cards and payments income of $107 million indicates a 3.6% sequential fall.

Mortgage loan originations as well as refinancing continued to normalize in the fourth quarter. The origination boom in 2020, propelled by the ultra-low rates, makes comparison difficult for the quarter. Mortgage rates rose in the quarter under review, which resulted in a drastic decline in mortgage origination activities, with steadily rising rates hurting refinancing. The factors are likely to have weighed on KEY’s mortgage banking business.

The Zacks Consensus Estimate for consumer mortgage income and mortgage servicing fees is pegged at $31.50 million and $31 million, suggesting a sequential decrease of 4.5% and 8.8%, respectively.

The consensus estimate for KeyCorp’s total non-interest income for the fourth quarter of 2021 of $800 million indicates a marginal rise on a sequential basis. Management expects non-interest income to be relatively stable on a sequential basis.

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

The company also expects non-interest expenses to be down in the low-single digits on a sequential basis.

Asset Quality: Similar to the last few quarters and driven by an improving macroeconomic backdrop and stable credit market conditions, KeyCorp is likely to have released reserves in the fourth quarter that it had taken earlier to cover losses from the effects of the coronavirus pandemic. This is expected to have supported the company’s earnings.

Management expects net charge-offs (NCOs) to average loans to be in the lower 20-basis-point range.

What the Zacks Model Predicts

Our proven model does not predict an earnings beat for KeyCorp this time around. This is because it does not have 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 -1.26%.

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

KeyCorp Price and EPS Surprise


KeyCorp Price and EPS Surprise

KeyCorp price-eps-surprise | KeyCorp Quote

Notably, the Zacks Consensus Estimate for the company’s fourth-quarter earnings is pegged at 57 cents per share. The consensus estimate has been revised 1.8% upward over the past 30 days. Moreover, the figure suggests a 1.8% rise from the prior-year quarter’s reported number.

The consensus estimate for sales of $1.81 billion indicates a year-over-year decline of 1.7%.

Stocks Worth Considering

A few finance stocks, which you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases per our model, are Commerce Bancshares, Inc. (CBSH - Free Report) , BankUnited, Inc. (BKU - Free Report) and Ally Financial Inc. (ALLY - Free Report) .

The Earnings ESP for Commerce Bancshares is +0.71% and it carries a Zacks Rank of 3 at present. CBSH is scheduled to report quarterly numbers on Jan 19.

BankUnited is slated to report quarterly results on Jan 20. BKU currently has an Earnings ESP of +42.98% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ally Financial is slated to report quarterly earnings on Jan 21. ALLY, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +2.55%.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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