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Margin Pressure & Rising Costs Hurt KeyCorp's Profitability

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KeyCorp’s (KEY - Free Report) financials are likely to be affected by low interest rates and a number of geopolitical issues. Moreover, mounting operating expenses is a key near-term concern.

Following the Federal Reserve’s accommodative monetary-policy stance, the company’s net interest margin (NIM) is expected to remain under pressure in the upcoming period. The bank has lowered its prime lending rate to 5.00% following the rate cuts in July and September. Although KeyCorp’s NIM registered growth over the past few years, it declined in first-half 2019. In addition, decline in yields might further impede growth in NIM.

Moreover, mounting expenses, mainly due to the company's investments in franchise and acquisitions, and technological upgrades will likely curtail bottom-line growth to some extent. Though expenses declined in the first half of 2019, the same witnessed a five-year (2014-2018) CAGR of 9.5%.

Additionally, KeyCorp’s exposure to risky loan portfolios (residential prime and commercial real estate loans) is another chief concern for the company. As of Jun 30, 2019, its exposure to these loan portfolios was 34.1% of total loans.

The bank has been undertaking inorganic growth initiatives to boost its financials in a bid to counter the above-mentioned concerns. In April, KeyCorp acquired Laurel Road Bank’s digital lending operation. The company is likely to continue with its opportunistic acquisitions to diversify revenue sources. Similarly, other financial institutions, including LPL Financial Holdings Inc. (LPLA - Free Report) , Stifel Financial Corporation (SF - Free Report) and Valley National Bancorp (VLY - Free Report) , are resorting to buyouts.

KeyCorp is also witnessing increase in loan and deposit balances, and improving asset quality, which will likely support its financials to some extent.

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