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Lower NII to Hurt KeyCorp (KEY) Q3 Earnings, Fee Income to Aid

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KeyCorp (KEY - Free Report) is slated to announce third-quarter 2023 results on Oct 19, before the opening bell. The to-be-reported quarter witnessed a subdued overall lending scenario.

Per the Federal Reserve’s latest data, the demand for consumer loans (constituting roughly 30% of KeyCorp’s average loan balances) remained decent, while the demand for commercial and industrial loans (accounting for almost 50% of average loan balances) was muted during the quarter.

Management projects average loan balance to be down 1-3% sequentially. We expect average loan balance to be $119.1 billion, down 1.3% from the prior quarter.

The Zacks Consensus Estimate for KEY’s average earning assets is pegged at $176.7 billion, indicating a decline of 2.2% from the prior quarter’s reported number. Our estimate for the metric is pinned at $175 billion, suggesting a 3.1% fall.

Moreover, while the Fed kept interest rates unchanged at 5.25-5.5% during the September FOMC meeting, it hiked rates by 25 basis points in July. 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 bigger offsetting factors.

The consensus estimate for KEY’s NII (on a fully tax-equivalent basis) is pegged at $930.7, suggesting a decline of 5.6% sequentially. We project NII to fall 5.4% to $932.3 million.

Management expects NII to be down 4-6% sequentially.

Other Key Factors to Impact Q3 Results

Non-Interest Income: Rising mortgage rates (the rate on the 30-year fixed mortgage touching 7.3% in September) and inflation weighed on mortgage originations and refinancing activities in the third quarter, which are expected to have hurt KeyCorp’s mortgage banking business. The Zacks Consensus Estimate for commercial mortgage servicing fees of $49.1 million suggests a 1.8% decline, while consumer mortgage income of $13.4 million indicates a 4.3% fall. Our estimates for commercial mortgage servicing fees and consumer mortgage income are $44.5 million and $11.7 million, respectively.

The Zacks Consensus Estimate for cards and payments income of $86 million suggests stability. Our estimate for the same is $83.3 million, indicating a decline of 2.3%.

The Zacks Consensus Estimate of $71.2 million for service charges on deposit accounts implies a 3.2% rise. The consensus estimate for trust and investment services income of $127.8 million suggests an increase of 1.4% from the prior quarter. Our estimates for service charges on deposit accounts and trust and investment services income are $72.5 million and $123.6 million, respectively.

Subdued volatility and client activity in the capital markets are expected to have negatively impacted KEY’s trading activities in the quarter. While green shoots were visible in the quarter, global deal-making activities were muted. Further, IPOs and follow-up equity issuances remained soft in the quarter. On the other hand, bond issuance volume acted as a tailwind. The consensus estimate for KeyCorp’s IB and debt placement fees of $128.3 million indicates a 6.9% quarter-over-quarter rise. We expect the metric to be $124.6 million.

Therefore, the consensus estimate for KeyCorp’s total non-interest income of $626.2 million indicates sequential growth of 2.8%. Our estimate is $625.1 million, implying a 2.6% increase.

KeyCorp anticipates non-interest income to be up 2-4% sequentially.

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 third quarter.

Our estimate for total non-interest expenses is pinned at $1.08 billion, relatively stable on a sequential basis.

Management expects non-interest expenses (excluding FDIC special assessment) to be stable on a sequential basis.

Asset Quality: KeyCorp is expected to have set aside money for potential bad loans, given the global economic slowdown risk due to geopolitical and macroeconomic concerns, and tighter financial conditions. Our estimate for provision for credit losses is pegged at $133.7 million.

The Zacks Consensus Estimate for non-performing assets (NPAs) is pegged at $462.7 million, indicating a marginal rise from the last reported quarter. The consensus estimate for total non-performing loans of $437.1 suggests a 1.4% increase.

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 -1.97%.

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

Q3 Earnings & Sales Growth Expectations

The Zacks Consensus Estimate for KEY’s third-quarter earnings is pegged at 27 cents, which has been revised 3.6% lower over the past 30 days. The figure suggests a 50.9% plunge from the prior-year quarter. Our estimate for earnings is 26 cents per share.

The consensus estimate for sales of $1.55 billion indicates a year-over-year decline of 17.4%. Our estimate for sales is the same as the consensus number.

Stocks Worth Considering

A couple of bank 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 Bank OZK (OZK - Free Report) and Fifth Third Bancorp (FITB - Free Report) .

The Earnings ESP for OZK is +1.62% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2023 results on Oct 19.

FITB is also scheduled to release quarterly results on Oct 19. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.44%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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


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