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Lower NII, Fee Income to Hurt KeyCorp's (KEY) Q4 Earnings

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KeyCorp (KEY - Free Report) is slated to announce fourth-quarter 2023 results on Jan 18, 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 weak in October and November. While the demand for commercial and industrial loans (accounting for almost 50% of average loan balances) was decent in October, the same declined in November.

Management projects the average loan balance to decline 1-3% sequentially in the fourth quarter. We expect the average loan balance to be $114.4 billion, down 2.8% from the prior-year quarter.

The Zacks Consensus Estimate for KEY’s average earning assets is pegged at $171.5 billion, indicating a marginal decline from the prior-year quarter’s reported number. Our estimate for the metric is pinned at $163.2 billion, suggesting a 5.1% fall.

While interest rates remained high in the fourth quarter, the Fed paused its rate hike cycle, with indications of rate cuts in 2024. Thus, despite higher rates, KEY’s net interest margin and net interest income (NII) are expected to have been negatively impacted by muted loan growth, and rising deposit and funding costs.

The consensus estimate for KEY’s NII (on a fully tax-equivalent basis) is pegged at $916 million, suggesting a year-over-year decline of 25.3%. We project NII to fall 23.6% to $937.6 million.

Management expects fourth-quarter NII to be stable sequentially. For 2023, management expects NII to decline 12-14% on a year-over-year basis.

Other Key Factors to Impact Q4 Results

Non-Interest Income: While mortgage rates declined in December (the average rate on the 30-year fixed mortgage touched 6.76% in December), mortgage originations did not improve much in the quarter. Nevertheless, supported by lower rates, there was a rise in refinancing activities, which is expected to have supported KEY’s mortgage banking business.

The Zacks Consensus Estimate for commercial mortgage servicing fees of $45.79 million suggests a 9% year-over-year rise, while consumer mortgage income of $14.37 million indicates a 59.7% rise. Our estimates for commercial mortgage servicing fees and consumer mortgage income are $44.5 million and $11.9 million, respectively.

The Zacks Consensus Estimate for cards and payments income of $92 million suggests a year-over-year rise of 8.2%. Our estimate for the same is pinned at $82.2 million.

The Zacks Consensus Estimate of $70 million for service charges on deposit accounts implies a 1.4% decline. The consensus estimate for trust and investment services income of $132 million suggests an increase of 4.8% from the prior-year quarter. Our estimates for service charges on deposit accounts, and trust and investment services income are $66.6 million and $123.1 million, respectively.

Subdued volatility and low 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 in the quarter, global deal-making activities were muted. IPOs tumbled and bond issuance volumes were soft. The consensus estimate for KeyCorp’s IB and debt placement fees of $137 million indicates a 20.3% year-over-year decline. We expect the metric to be $132.8 million.

Therefore, the consensus estimate for KeyCorp’s total non-interest income of $638 million indicates a year-over-year decline of 4.9%. Our estimate for the metric is pinned at $609.9 million, suggesting a 9.1% fall.

KeyCorp anticipates fourth-quarter non-interest income to decline 5-8% sequentially. For 2023, non-interest income is expected to fall 7-9% from the previous year.

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 fourth quarter.

Our estimate for total non-interest expenses is pinned at $1.11 billion.

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

Asset Quality: We estimate provision for credit losses to be $183.9 million in the fourth quarter, suggesting a 30.6% year-over-year decline.

The Zacks Consensus Estimate for non-performing assets (NPAs) is pegged at $475 million, indicating a 13.1% rise from the prior-year reported quarter.

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 -4.26%.

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

Q4 Earnings & Sales Growth Expectations

The Zacks Consensus Estimate for KEY’s fourth-quarter earnings is pegged at 23 cents, which has been unchanged over the past seven days. The figure suggests a 39.5% plunge from the prior-year quarter’s actual. Our estimate for earnings is pinned at 18 cents per share.

The consensus estimate for sales of $1.53 billion indicates a year-over-year decline of 19.2%. Our estimate for sales stands at $1.54 billion.

Major Bank Stocks Worth Considering

Here are a couple of major 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:

The Earnings ESP for U.S. Bancorp (USB - Free Report) is +0.24% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.

Over the past seven days, the Zacks Consensus Estimate for USB’s quarterly earnings has remained unchanged at 99 cents.

M&T Bank (MTB - Free Report) is scheduled to release fourth-quarter and full-year 2023 earnings on Jan 18. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.01%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MTB’s quarterly earnings estimates have moved almost 1% lower over the past week to $3.70.

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


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