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KeyCorp (KEY) Hurt by Rising Expenses, Weak Credit Quality
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KeyCorp (KEY - Free Report) is expected to witness a persistent rise in operating expenses. This, along with deteriorating credit quality, is a major headwind. However, higher interest rates, strategic buyouts and decent loan demand offer some support.
KEY continues to record a rise in non-interest expenses. Though it declined in 2018 and 2019, the metric has witnessed a compound annual growth rate (CAGR) of 1.5% over the last six years (2017-2022). The rise was mainly due to an increase in personal costs. The upward trend in expenses continued in the first quarter of 2023.
Expenses are expected to remain high as the company continues to invest in franchises and expand through technological upgrades, inflationary pressure and an inorganic growth strategy. We project total non-interest expenses to witness a CAGR of 3% over the next three years.
Asset quality is another headwind for KeyCorp. Though provision for credit losses was a benefit in 2021, the same increased in 2019, 2020 and 2022. Similarly, while net charge-offs (NCOs) declined in both 2021 and 2022, the metric increased in the two years prior to this. Again, in the first quarter of 2023, both provisions and NCOs witnessed an uptrend. Going forward, the expectation of a worsening macroeconomic outlook and potential recession is likely to weaken the asset quality. We project provisions for credit losses and NCOs to surge 49.1% and 91.8%, respectively, this year.
Analysts also seem pessimistic regarding KEY’s earnings growth prospects. The Zacks Consensus Estimate for 2023 and 2024 earnings has been revised 2.6% and 2.9% lower, respectively, over the past seven days. Further, KEY currently carries a Zacks Rank #5 (Strong Sell).
Over the past three months, shares of KEY have plunged 24.8% against the industry's rise of 2.3%.
Image Source: Zacks Investment Research
Despite the above-mentioned concerns, KeyCorp is well placed to grow organically, driven by a decent rise in loan demand and higher rates. Further, given a solid balance sheet position, the company remains well-poised to expand on the back of opportunistic buyouts. These efforts will support revenue growth going forward. Though we project total revenues to decline 6.6% this year, it is likely to rebound and grow 1.2% and 7.2% in 2024 and 2025, respectively.
The Zacks Consensus Estimate for First Citizens BancShares' current-year earnings has been revised 67.2% upward over the past 60 days. Its shares have gained 61.5% over the past six months.
The consensus mark for The Bancorp's 2023 earnings has been revised 2.9% upward over the past 60 days. In the past six months, TBBK shares have rallied 12.7%.
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KeyCorp (KEY) Hurt by Rising Expenses, Weak Credit Quality
KeyCorp (KEY - Free Report) is expected to witness a persistent rise in operating expenses. This, along with deteriorating credit quality, is a major headwind. However, higher interest rates, strategic buyouts and decent loan demand offer some support.
KEY continues to record a rise in non-interest expenses. Though it declined in 2018 and 2019, the metric has witnessed a compound annual growth rate (CAGR) of 1.5% over the last six years (2017-2022). The rise was mainly due to an increase in personal costs. The upward trend in expenses continued in the first quarter of 2023.
Expenses are expected to remain high as the company continues to invest in franchises and expand through technological upgrades, inflationary pressure and an inorganic growth strategy. We project total non-interest expenses to witness a CAGR of 3% over the next three years.
Asset quality is another headwind for KeyCorp. Though provision for credit losses was a benefit in 2021, the same increased in 2019, 2020 and 2022. Similarly, while net charge-offs (NCOs) declined in both 2021 and 2022, the metric increased in the two years prior to this. Again, in the first quarter of 2023, both provisions and NCOs witnessed an uptrend. Going forward, the expectation of a worsening macroeconomic outlook and potential recession is likely to weaken the asset quality. We project provisions for credit losses and NCOs to surge 49.1% and 91.8%, respectively, this year.
Analysts also seem pessimistic regarding KEY’s earnings growth prospects. The Zacks Consensus Estimate for 2023 and 2024 earnings has been revised 2.6% and 2.9% lower, respectively, over the past seven days. Further, KEY currently carries a Zacks Rank #5 (Strong Sell).
Over the past three months, shares of KEY have plunged 24.8% against the industry's rise of 2.3%.
Image Source: Zacks Investment Research
Despite the above-mentioned concerns, KeyCorp is well placed to grow organically, driven by a decent rise in loan demand and higher rates. Further, given a solid balance sheet position, the company remains well-poised to expand on the back of opportunistic buyouts. These efforts will support revenue growth going forward. Though we project total revenues to decline 6.6% this year, it is likely to rebound and grow 1.2% and 7.2% in 2024 and 2025, respectively.
Bank Stocks Worth a Look
A couple of better-ranked stocks from the banking space are First Citizens BancShares (FCNCA - Free Report) and The Bancorp (TBBK - Free Report) , each sporting a Zanks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for First Citizens BancShares' current-year earnings has been revised 67.2% upward over the past 60 days. Its shares have gained 61.5% over the past six months.
The consensus mark for The Bancorp's 2023 earnings has been revised 2.9% upward over the past 60 days. In the past six months, TBBK shares have rallied 12.7%.