Loan growth, IB to help KeyCorp (KEY) in fourth quarter at low rates – January 17, 2022

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Key Corp (KEY Free Report) is expected to announce fourth quarter and 2021 results on January 20, before the opening bell. The overall lending scenario has been impressive in the quarter ahead.

According to the latest data from the Federal Reserve, consumer loans, which account for nearly 30% of KeyCorp’s average loan balances, rose in the quarter. Also, unlike the previous few quarters, commercial and industrial loan balances (representing nearly 50% of KEY’s average loan balances) saw an increase.

KeyCorp also expects the fourth quarter of 2021 to see an increase in commercial and consumer staples lending. Management expected average loan balances for the reportable quarter to be up in the low single digits on a sequential basis.

However, Zacks’ consensus estimate for the company’s average earning assets in the fourth quarter is pegged at $169 billion, suggesting a 7.1% sequential decline.

So, despite robust loan growth, KeyCorp’s interest income is not expected to see significant improvement due to the still low interest rate environment. The consensus estimate for net interest income (NII) (on a fully tax-equivalent basis) is $1.01 billion, indicating a 1.2% decline from the figure reported in the prior quarter.

The company expects the tax-equivalent NII (including continued participation in the Paycheck Protection Program or PPP and the impact of the sale of auto loans) to decline sequentially into the lower single digits , suggesting a lower PPP discount.

NIM should continue to reflect the impacts of excess liquidity on KEY’s balance sheet.

Other factors at play

Non-interest income: As in recent quarters, transactions continued at a strong pace in the fourth quarter of 2021, with the volume and value of transactions registering significant growth. This was primarily driven by the resumption of normal business activities, excess liquidity levels, corporate appetite to build scale and market share, and the strong economic recovery.

Likewise, the continued momentum in the IPO market and a steady increase in follow-on stock issuances should have supported the company’s stock underwriting costs during the quarter. Bond issuance volumes were modest. Thus, the performance of KeyCorp’s investment banking (IB) business should have been impressive in the quarter to report.

While trading activity normalized in the quarter compared to the prior year period, it remained decent compared to the third quarter of 2021. The consensus estimate for KeyCorp IB and Capital Markets revenue for the fourth quarter is set at $241 million, indicating a 2.6% increase sequentially.

The consensus deposit service charge estimate of $91 million indicates no change from the prior quarter.

Zacks’ consensus estimate for trust and investment services revenue of $130 million suggests a slight increase from the prior quarter. However, the consensus estimate for cards and payments revenue of $107 million indicates a 3.6% sequential decline.

Mortgage originations and refinancings continued to normalize in the fourth quarter. The 2020 origination boom, propelled by ultra-low rates, makes comparison difficult for the quarter. Mortgage rates rose in the quarter under review, leading to a drastic drop in mortgage origination activity as the steady rise in rates hampered refinancing. The factors likely weighed on KEY’s mortgage banking business.

The Zacks Consensus Estimate for Consumer Mortgage Revenue and Mortgage Servicing Fee is pegged at $31.50 million and $31 million, suggesting a sequential decrease of 4.5% and 8, 8%, respectively.

The consensus estimate for KeyCorp’s total noninterest revenue for the fourth quarter of 2021 of $800 million indicates a marginal increase on a sequential basis. Management expects non-interest income to be relatively stable on a sequential basis.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped it reduce costs in the past. The trend should also continue in the fourth quarter.

The company also expects non-interest expense to be down in the low numbers on a sequential basis.

Asset quality: Similar to recent quarters and driven by an improving macroeconomic backdrop and stable credit market conditions, KeyCorp is likely to have released reserves in the fourth quarter that it took earlier to cover losses from the effects of the coronavirus pandemic. This should have supported the company’s earnings.

Management expects net charges (NCO) on average loans to be in the lower 20 basis point range.

What the Zacks model predicts

Our proven model does not predict an earnings beat for KeyCorp this time around. This is because he lacks the right combination of the two key ingredients – a positive win ESP and Zacks rank #3 (Hold) or better – to increase the chances of a win beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: KeyCorp earnings ESP is -1.26%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Notably, Zacks’ consensus estimate for the company’s fourth-quarter earnings is pegged at 57 cents per share. The consensus estimate has been revised up 1.8% over the past 30 days. Additionally, the figure suggests a 1.8% increase over the number reported from the prior year quarter.

The consensus sales estimate of $1.81 billion points to a 1.7% year-over-year decline.

Actions to Consider

A few financial stocks, which you may want to consider as they have the right mix of elements to show a beating in earnings in their next iterations according to our model, are Commerce Bancshares, Inc. (CBSH free report), BankUnited, Inc. (BKU free report) and Ally Financial Inc. (ALLY free report).

ESP earnings for Commerce Bancshares is +0.71% and it currently carries a Zacks rank of 3. CBSH is expected to release quarterly numbers on January 19th.

BankUnited is expected to release its quarterly results on January 20. BKU currently has a profit ESP of +42.98% and Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ally Financial is expected to release its quarterly results on January 21. ALLY, which currently has a Zacks rating of 3, has an ESP of +2.55%.

Stay up to date with upcoming results announcements with the Zacks Earnings Schedule.

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