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Lower NII, Mortgage Income to Hurt KeyCorp's (KEY) Q2 Earnings
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KeyCorp (KEY - Free Report) is slated to announce second-quarter 2023 results on Jul 20, before the opening bell. The to-be-reported quarter witnessed a gradual slowdown in the overall lending scenario.
Per the Fed’s latest data, while the demand for consumer loans (constituting roughly 30% of KeyCorp’s average loan balances) remained decent, the demand for commercial and industrial loans (accounting for almost 50% of average loan balances) waned in the quarter.
Nevertheless, the Zacks Consensus Estimate for KEY’s average earning assets for the second quarter, pegged at $178.3 billion, indicates a rise of 7.6% from the prior-year quarter’s reported number. Our estimate for the metric is pinned at $177.3 billion, suggesting a 6.9% rise.
Moreover, while the Federal Reserve kept interest rates unchanged at 5-5.25% during the June FOMC meeting, it hiked rates by 25 basis points in May. This is likely to have resulted in an improvement in KEY’s net interest income (NII) and net interest margin (NIM). However, the inverted yield curve and rising funding costs are anticipated to have been offsetting factors.
Thus, the consensus estimate for KEY’s second-quarter NII (on a fully tax-equivalent basis) is pegged at $1 billion, suggesting a decline of 8.9% from the previous-year quarter’s reported number. We project NII to decline 12% to $971 million.
Also, management expects second-quarter 2023 NII to be down 12% sequentially.
Other Key Factors and Estimates for Q2
Non-Interest Income: Subdued volatility and client activity in the capital markets are expected to have negatively impacted KEY’s trading activities in the quarter.
Moreover, while green shoots were visible toward the end of the quarter, global deal-making continued to shrink on a year-over-year basis. A host of factors like geopolitical tensions, stand-off over the U.S. debt ceiling, inflation concerns, rising interest rates and fears of a global recession acted as major headwinds. The total deal volume and deal value numbers crashed.
For similar reasons, IPOs and follow-up equity issuances dried up in the quarter. Bond issuance volume was also muted as investors turned pessimistic. These are expected to have hurt KeyCorp’s investment banking (IB) business in the to-be-reported quarter.
The consensus estimate for KeyCorp’s IB and debt placement fees of $146 million indicates a 2% year-over-year decline.
Rising mortgage rates (the rate on the 30-year fixed mortgage remaining above the 6% mark) and inflation weighed on mortgage originations and refinancing activities in the second quarter, which are expected to have hurt KeyCorp’s mortgage banking business. The Zacks Consensus Estimate for consumer mortgage income is pegged at $12.53 million, implying a 10.5% decline on a year-over-year basis. Our estimate for consumer mortgage income is $12.4 million, implying an 11.6% year-over-year decline.
The Zacks Consensus Estimate for cards and payments income of $86 million suggests a 1.2% rise from the prior-year quarter’s reported figure. Our estimate for the same is $88.4 million, indicating a rise of 4%.
The Zacks Consensus Estimate of $71 million for service charges on deposit accounts implies a 26% decline. The consensus estimate for trust and investment services income of $132 million suggests a fall of 3.6% from the prior-year quarter’s actuals. Our estimates for service charges on deposit accounts, and trust and investment services income are $83.9 million and $134 million, respectively.
Therefore, the consensus estimate for KeyCorp’s total non-interest income of $649 million indicates a year-over-year fall of 5.7%. Our estimate for the same is $684.3 million, implying a marginal decline.
Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped it save costs in the past. Yet, as the company has been investing in franchise, technological upgrades and inorganic growth strategy, expenses are expected to have been elevated to some extent in the second quarter.
Our estimate for total non-interest expenses is pinned at $1.04 billion, indicating a 3.5% decline from the prior-year quarter’s reported number.
Asset Quality: KeyCorp is expected to have set aside substantial money for potential bad loans, given the global recession risk due to geopolitical and macroeconomic concerns, and tighter financial conditions. Our estimate for provision for credit losses is pegged at $216.3 million, implying a substantial jump from the year-ago quarter’s reported figure. We expect non-performing assets (NPAs) to increase 8.9% year over year to $504.3 million.
What the Zacks Model Predicts
Our proven model doesn’t 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 higher.
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 +0.38%.
Zacks Rank: The company currently carries a Zacks Rank #5 (Strong Sell).
The Zacks Consensus Estimate for KEY’s second-quarter earnings is pegged at 29 cents, which has been revised 3.3% lower over the past seven days. The figure suggests a 46.3% decline from the prior-year quarter’s reported number. Our estimate for earnings is 31 cents per share.
The consensus estimate for sales of $1.61 billion indicates a year-over-year decline of 9.9%. Our estimate for sales is pinned at $1.65 billion.
Stocks Worth Considering
A couple of finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around, are Invesco (IVZ - Free Report) and Moody's Corporation (MCO - Free Report) .
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Lower NII, Mortgage Income to Hurt KeyCorp's (KEY) Q2 Earnings
KeyCorp (KEY - Free Report) is slated to announce second-quarter 2023 results on Jul 20, before the opening bell. The to-be-reported quarter witnessed a gradual slowdown in the overall lending scenario.
Per the Fed’s latest data, while the demand for consumer loans (constituting roughly 30% of KeyCorp’s average loan balances) remained decent, the demand for commercial and industrial loans (accounting for almost 50% of average loan balances) waned in the quarter.
Nevertheless, the Zacks Consensus Estimate for KEY’s average earning assets for the second quarter, pegged at $178.3 billion, indicates a rise of 7.6% from the prior-year quarter’s reported number. Our estimate for the metric is pinned at $177.3 billion, suggesting a 6.9% rise.
Moreover, while the Federal Reserve kept interest rates unchanged at 5-5.25% during the June FOMC meeting, it hiked rates by 25 basis points in May. This is likely to have resulted in an improvement in KEY’s net interest income (NII) and net interest margin (NIM). However, the inverted yield curve and rising funding costs are anticipated to have been offsetting factors.
Thus, the consensus estimate for KEY’s second-quarter NII (on a fully tax-equivalent basis) is pegged at $1 billion, suggesting a decline of 8.9% from the previous-year quarter’s reported number. We project NII to decline 12% to $971 million.
Also, management expects second-quarter 2023 NII to be down 12% sequentially.
Other Key Factors and Estimates for Q2
Non-Interest Income: Subdued volatility and client activity in the capital markets are expected to have negatively impacted KEY’s trading activities in the quarter.
Moreover, while green shoots were visible toward the end of the quarter, global deal-making continued to shrink on a year-over-year basis. A host of factors like geopolitical tensions, stand-off over the U.S. debt ceiling, inflation concerns, rising interest rates and fears of a global recession acted as major headwinds. The total deal volume and deal value numbers crashed.
For similar reasons, IPOs and follow-up equity issuances dried up in the quarter. Bond issuance volume was also muted as investors turned pessimistic. These are expected to have hurt KeyCorp’s investment banking (IB) business in the to-be-reported quarter.
The consensus estimate for KeyCorp’s IB and debt placement fees of $146 million indicates a 2% year-over-year decline.
Rising mortgage rates (the rate on the 30-year fixed mortgage remaining above the 6% mark) and inflation weighed on mortgage originations and refinancing activities in the second quarter, which are expected to have hurt KeyCorp’s mortgage banking business. The Zacks Consensus Estimate for consumer mortgage income is pegged at $12.53 million, implying a 10.5% decline on a year-over-year basis. Our estimate for consumer mortgage income is $12.4 million, implying an 11.6% year-over-year decline.
The Zacks Consensus Estimate for cards and payments income of $86 million suggests a 1.2% rise from the prior-year quarter’s reported figure. Our estimate for the same is $88.4 million, indicating a rise of 4%.
The Zacks Consensus Estimate of $71 million for service charges on deposit accounts implies a 26% decline. The consensus estimate for trust and investment services income of $132 million suggests a fall of 3.6% from the prior-year quarter’s actuals. Our estimates for service charges on deposit accounts, and trust and investment services income are $83.9 million and $134 million, respectively.
Therefore, the consensus estimate for KeyCorp’s total non-interest income of $649 million indicates a year-over-year fall of 5.7%. Our estimate for the same is $684.3 million, implying a marginal decline.
Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped it save costs in the past. Yet, as the company has been investing in franchise, technological upgrades and inorganic growth strategy, expenses are expected to have been elevated to some extent in the second quarter.
Our estimate for total non-interest expenses is pinned at $1.04 billion, indicating a 3.5% decline from the prior-year quarter’s reported number.
Asset Quality: KeyCorp is expected to have set aside substantial money for potential bad loans, given the global recession risk due to geopolitical and macroeconomic concerns, and tighter financial conditions. Our estimate for provision for credit losses is pegged at $216.3 million, implying a substantial jump from the year-ago quarter’s reported figure. We expect non-performing assets (NPAs) to increase 8.9% year over year to $504.3 million.
What the Zacks Model Predicts
Our proven model doesn’t 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 higher.
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 +0.38%.
Zacks Rank: The company currently carries a Zacks Rank #5 (Strong Sell).
The Zacks Consensus Estimate for KEY’s second-quarter earnings is pegged at 29 cents, which has been revised 3.3% lower over the past seven days. The figure suggests a 46.3% decline from the prior-year quarter’s reported number. Our estimate for earnings is 31 cents per share.
KeyCorp Price and EPS Surprise
KeyCorp price-eps-surprise | KeyCorp Quote
The consensus estimate for sales of $1.61 billion indicates a year-over-year decline of 9.9%. Our estimate for sales is pinned at $1.65 billion.
Stocks Worth Considering
A couple of finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around, are Invesco (IVZ - Free Report) and Moody's Corporation (MCO - Free Report) .
The Earnings ESP for IVZ is +0.84% and it carries a Zacks Rank #3 at present. The company is slated to report second-quarter 2023 results on Jul 25. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MCO is scheduled to release quarterly results on Jul 25. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +4.38%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.