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KeyCorp (KEY) Q1 Earnings Beat on Lower Costs, Provisions Up

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KeyCorp’s (KEY - Free Report) first-quarter 2020 earnings of 12 cents per share surpassed the Zacks Consensus Estimate of 6 cents. The figure takes into account the Current Expected Credit Losses accounting methodology, the impact of coronavirus and market-related valuation adjustments.

The results benefited from lower operating expenses and higher loan balance. However, lower net interest income and significantly higher provisions were the undermining factors.

Net income from continuing operations was $118 million, down 69.4% from the prior-year quarter.

Revenues & Expenses Decline

Total revenues were down 3.6% year over year to $1.47 billion. Also, the figure lagged the Zacks Consensus Estimate of $1.55 billion.

Tax-equivalent net interest income grew marginally on a year-over-year basis to $989 million. The rise was attributable to higher earning asset balances, partially offset by lower net interest margin (NIM).

Taxable-equivalent NIM from continuing operations decreased 12 basis points (bps) year over year to 3.01%.

Non-interest income was $477 million, decreasing 11% year over year. The decline was primarily due to other losses and lower operating lease income.

Non-interest expenses declined 3.3% year over year to $931 million. The decrease largely reflects the implementation of the company’s expense initiatives, partially offset by costs from the Laurel Road acquisition.

At first quarter-end, average total deposits were $110.3 billion, down 2% from the prior quarter. Average total loans were $96.2 billion, up 2.7% on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, grew 6 bps year over year to 0.35%. Also, provision for credit losses surged substantially from the year-ago quarter to $359 million. The rise primarily reflected the significant change in the economic scenario amid the coronavirus pandemic.  

KeyCorp’s allowance for loan and lease losses was $1.36 billion, up 53.9% from the prior-year quarter.

Also, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.82%, up 16 bps.

Capital Ratios Deteriorates

KeyCorp's tangible common equity to tangible assets ratio was 8.26% as of Mar 31, 2020, down from 8.43% in the corresponding period of 2019. However, Tier 1 risk-based capital ratio was 10.31%, down from 10.94% in the comparable prior-year period.

Share Repurchase Update

During the first quarter, KeyCorp repurchased $120 million worth of shares as part of the 2019 capital plan. In March, the company suspended the share buyback plan in response to the pandemic.

Our Take

Decent loan growth is expected to support revenues amid the Federal Reserve’s accommodative stance. Despite a decline in costs in the first quarter, the company’s overall expenses are expected to remain elevated because of investments in franchise, technological upgrades and inorganic growth strategy.

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 Banks

PNC Financial (PNC - Free Report) reported first-quarter 2020 earnings per share of $1.95, surpassing the Zacks Consensus Estimate of $1.38 amid coronavirus concerns. The bottom line, however, reflects a 25.3% decline from the prior-year reported figure.

U.S. Bancorp (USB - Free Report) reported first-quarter 2020 earnings per share of 72 cents, which surpassed the Zacks Consensus Estimate of 49 cents. However, the bottom line declined 28% from the prior-year quarter figure.

Driven by top-line strength, First Republic Bank (FRC - Free Report) delivered a positive earnings surprise of 30.4% in first-quarter 2020. Earnings per share of $1.20 surpassed the Zacks Consensus Estimate of 92 cents. However, the bottom line was down 4.8% from the year-ago quarter.

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