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KeyCorp (KEY) Q3 Earnings Impress on First Niagara Synergies

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KeyCorp.’s (KEY - Free Report) third-quarter 2016 adjusted earnings of 30 cents per share outpaced the Zacks Consensus Estimate of 26 cents. The figure was up 15.4% from the prior-year quarter.

KeyCorp’s shares rose over 3% in pre-market trading, reflecting  impressive organic growth. Notably, the price reaction during the full trading session will provide a better idea about how investors have accepted the results.

Better-than-expected results indicate revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016). Further, the company reported impressive growth in loans and deposits. However, higher operating expenses and a rise in provision for credit losses were the downside. Also, margin pressure persisted during the quarter.

Including non-recurring merger-related charges of $207 million, Keycorp’s net income from continuing operations came in at $165 million, down 23.6% from the prior-year quarter.


Revenues Surge on First Niagara Deal, Expenses Escalate

Total revenue surged 26.3% year over year to $1.35 billion. Also, this compared favorably with the Zacks Consensus Estimate of $1.29 billion.

Tax-equivalent net interest income grew 31.8% year over year to $788 million. The rise was driven by higher earning asset balances and the First Niagara deal. However, taxable-equivalent net interest margin from continuing operations fell 2 basis points (bps) year over year to 2.85%.

Non-interest income was $549 million, up 16.8% from the year-ago quarter. The increase was mainly supported by investment banking and debt placement fees (up 43.1%), consumer mortgage income (100.0%), operating leasing income and card and payment income (40.4%). These were partly offset by a decline in corporate services income, net gains on principal investing and operating lease income and other leasing gains.

Non-interest expense jumped 49.4% year over year to $1.08 billion due to a rise in both personnel as well as non-personnel expenses. Also, higher merger-related charges led to a rise in expenses.

Healthy Balance Sheet

As of Sep 30, 2016, average total deposits were $94.9 billion, up 28.4% from the prior quarter. Further, average total loans were $77.7 billion, up 27.1% from Jun 30, 2016.

Credit Quality: A Mixed Bag

Net loan charge-offs, as a percentage of average loans, fell 4 bps year over year to 0.23%.

Provision for credit losses increased 31.1% year over year to $59 million. Also, KeyCorp’s allowance for loan and lease losses was $865 million, up 9.5% year over year. Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.89%, up 20 bps year over year.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 8.26% as of Sep 30, 2016, down from 9.90% as of Sep 30, 2015. In addition, Tier 1 risk-based capital ratio was 10.52% versus 10.87% as of Sep 30, 2015.

The company’s estimated Basel III Tier 1 common ratio was 9.55% at the end of the quarter, down from 10.47% as of Sep 30, 2015.

Share Repurchases

During the reported quarter, KeyCorp repurchased $65 million worth share as part of its 2016 capital plan.

Our Take

Persistent decline in KeyCorp’s net interest margin remains a major concern. Moreover, increased dependence on home equity and commercial real estate loans raises the exposure of the company’s profits to these avenues. Further, we remain concerned about the impact of stringent regulations in the near term.

However, restructuring initiatives being undertaken by the company will be supported by a robust balance-sheet position. In addition, the company’s financials will continue to benefit from the synergies from the First Niagara transaction.

 

KEYCORP NEW Price, Consensus and EPS Surprise

 

KEYCORP NEW Price, Consensus and EPS Surprise | KEYCORP NEW Quote

Keycorp currently carries a Zacks Rank #4 (Sell).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Performance of Other Major Banks

A notable rise in top line drove BB&T Corporation’s third-quarter 2016 adjusted earnings of 76 cents per share. This comfortably beat the Zacks Consensus Estimate of 70 cents.

Significantly lower provisions and higher fee revenues drove Regions Financial Corporation's (RF - Free Report) third-quarter 2016 earnings from continuing operations of 24 cents per share, which surpassed the Zacks Consensus Estimate of 21 cents.

A rise in revenues drove SunTrust Banks, Inc.'s (STI - Free Report) third-quarter 2016 earnings of 91 cents per share, which outpaced the Zacks Consensus Estimate of 89 cents. The prior-year quarter result excluded 11 cents of benefit from discrete items.

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