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KeyCorp (KEY) Q1 Earnings Miss on Lower NII, Stock Slides

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KeyCorp’s (KEY - Free Report) first-quarter 2024 adjusted earnings from continuing operations of 22 cents per share missed the Zacks Consensus Estimate by a penny. The bottom line compared unfavorably with 30 cents earned in the prior-year quarter.

The stock lost more than 1% in pre-market trading on spread income weakness.

Results were adversely impacted by lower net interest income (NII) and an increase in expenses. Further, higher deposit costs and lower average loan balance weighed on net interest margin (NIM) despite a higher interest rate environment. However, lower provisions and a rise in non-interest income acted as tailwinds.

After considering the FDIC special assessment charge, net income from continuing operations attributable to common shareholders was $183 million, plunging 33.3% year over year. Our estimate for the metric was $201.8 million.

Revenues Decline, Expenses Fall

Quarterly total revenues (tax equivalent) declined 10.6% year over year to $1.53 billion. However, the top line beat the Zacks Consensus Estimate of $1.51 billion.

NII (on a tax-equivalent basis) declined 19.9% to $886 million. The fall was due to a higher interest rate environment and KEY’s balance sheet optimization efforts. Our estimate for NII (FTE) was $892.5 million.

Taxable-equivalent NIM from continuing operations decreased 45 basis points (bps) to 2.02%. We had expected NIM to be 2.06%.

Non-interest income was $647 million, up 6.4%. The rise was largely driven by higher investment banking and debt placement fees, commercial mortgage servicing fees and consumer mortgage income.

Non-interest expenses decreased 2.8% from the prior-year quarter to $1.14 billion. This included the additional FDIC special assessment charge of $29 million. Excluding it, expenses were relatively stable. We projected the metric to be $1.09 billion (didn’t include the above-mentioned charge).

At the first-quarter end, average total deposits were $142.9 billion, down 1.5% from the prior-quarter end. The decline was due to seasonal deposit outflows and lower wholesale deposit balances. Our estimate for the metric was $141.6 billion.

Average total loans were $111 billion, down 2.6% sequentially. The decline was due to the company’s planned balance sheet optimization efforts. We had anticipated average total loans of $110.8 billion.

Credit Quality Weakens

Net loan charge-offs, as a percentage of average loans, rose 14 bps year over year to 0.29%. The allowance for loan and lease losses was $1.54 billion, up 11.7%.

Non-performing assets, as a percentage of period-end portfolio loans, other real estate-owned properties assets and other non-performing assets were 0.61%, up 9 bps year over year.

However, the provision for credit losses was $101 million, decreasing 27.3% year over year. The decline reflected a more stable economic outlook and the impacts of KeyCorp’s balance sheet optimization efforts. We had expected the metric to be $106.6 million.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 5% as of Mar 31, 2024, up from 4.6% in the corresponding period of 2023. The Tier 1 risk-based capital ratio was 12%, up from 10.6%. The Common Equity Tier 1 ratio was 10.3%, up from 9.1% as of Mar 31, 2023.

Our Take

Decent loan balances, along with higher interest rates, are likely to support KeyCorp’s revenues in the near term, though rising funding costs continue to exert pressure. Weakening asset quality amid a tough macroeconomic backdrop is a major near-term concern.
 

KeyCorp Price, Consensus and EPS Surprise

KeyCorp Price, Consensus and EPS Surprise

KeyCorp price-consensus-eps-surprise-chart | KeyCorp Quote

KeyCorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

PNC Financial’s (PNC - Free Report) first-quarter 2024 adjusted earnings per share of $3.36 surpassed the Zacks Consensus Estimate of $3.09. The adjusted figure excludes the impacts of expenses from the FDIC special assessment. In the prior-year quarter, the company reported earnings of $3.98.

PNC’s results were aided by a rise in deposit balances and an improvement in the company’s credit quality. However, an increase in non-interest expenses and lower NII were headwinds.

M&T Bank’s (MTB - Free Report) first-quarter 2024 net operating earnings per share of $3.09 missed the Zacks Consensus Estimate of $3.13. Also, the bottom line compared unfavorably with the $4.09 earned in the year-ago quarter.

Results were adversely impacted by the rise in provision for credit losses, a decline in NII and higher expenses. On the other hand, a rise in loans and leases, and higher rates offered some support to MTB’s quarterly performance.


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