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KeyCorp (KEY) Banks on High Rates, Fee Income Amid Cost Woes

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KeyCorp (KEY - Free Report) is well-positioned for top-line growth, supported by its strategic acquisitions and focus on bolstering fee income. Given a solid capital position, the company is expected to keep enhancing shareholder value through efficient capital distributions.

However, elevated expenses on the back of technology upgrades will likely keep hurting its bottom line. Also, the company’s significant commercial loan exposure makes us apprehensive.

As a result, analysts are neutral toward the stock. The Zacks Consensus Estimate for KEY’s current-year earnings has been unchanged over the past 30 days. The company currently carries a Zacks Rank #3 (Hold).

Over the past six months, shares of KeyCorp have gained 44.5% compared with the industry’s growth of 33.2%.

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Looking at its fundamentals, though the company’s tax-equivalent revenues declined in 2019, 2022 and 2023, the same witnessed a compound annual growth rate (CAGR) of 0.3% over the last six years (2017-2023). During the four-year period ended 2023, loans witnessed a CAGR of 4.3% and deposits saw a CAGR of 6.8%.

Supported by the continued rise in the demand for loans, along with the company’s efforts to strengthen fee income, its top line is expected to keep improving.

The Federal Reserve is expected to keep interest rates high for some time in the near term. Supported by higher rates and loan growth, KeyCorp’s net interest margin (NIM) is likely to continue to witness growth, though the pace of expansion will slow down on higher funding cost.

Because of lower interest rates, the company’s NIM from continuing operations declined to 2.50% in 2021 from 2.77% in 2020, 3.04% in 2019 and 3.17% in both 2018 and 2017. Nevertheless, NIM increased to 2.64% in 2022. Though the metric witnessed a decline in 2023 to 2.17% on rising deposit costs, the same is expected to improve in the near term. We anticipate NIM to be 2.41%, 3.00% and 3.45% in 2024, 2025 and 2026, respectively.

KeyCorp’s business restructuring efforts remain impressive. In 2022, the company acquired GradFin, which strengthened its digital offering capabilities. In 2021, it acquired a B2B-focused digital platform, XUP Payments and a data analytics-driven consultancy firm, AQN Strategies LLC. In 2019, the company acquired Laurel Road Bank’s digital lending operation and further expanded its operation with the launch of Laurel Road for Doctors in March 2021.

These, along with several past buyouts, are expected to strengthen its product suites and market share. The company is expected to keep witnessing fee income growth going forward. We project total non-interest income to rise 5.1%, 5.3% and 3.6% in 2024, 2025 and 2026, respectively.

However, while KEY’s expenses declined in 2018 and 2019 driven by its $200 million cost-reduction program, the same witnessed a five-year (2018-2023) CAGR of 3.6%. The rise was mainly due to higher personal costs. The company’s investments in franchises, technological upgrades and its inorganic growth strategy will likely keep costs elevated in the near term. While we project total non-interest expenses to decline 5.8% in 2024, the metric is expected to rise 3.7% and 0.7% in 2025 and 2026, respectively.

Weak asset quality is another headwind for KeyCorp. The company’s provisions and net-charge offs (NCOs) have been recording a volatile trend. Going forward, the expectation of a tough macroeconomic backdrop is likely to weaken asset quality. While we project provisions to decline in 2024, NCOs are expected to rise 38.1%.

KeyCorp has substantial exposure to commercial loans. As of Dec 31, 2023, the company’s exposure to these loan portfolios was 69% of total loans. The current rapidly changing macroeconomic backdrop is expected to put some strain on commercial lending. Thus, a lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Stocks Worth a Look

Some better-ranked stocks from the finance space are Piper Sandler Companies (PIPR - Free Report) and Nomura Holdings, Inc. (NMR - Free Report) . Currently, PIPR sports a Zacks Rank #1 (Strong Buy) and NMR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for PIPR have been revised 9.1% upward for the current year over the past 60 days. Over the past six months, shares of PIPR have rallied 37.1%.

Over the past 60 days, the Zacks Consensus Estimate for NMR’s current fiscal-year earnings has been revised 43.5% upward. The stock has gained 55.3% over the past six months.

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