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KeyCorp (KEY) Q2 Earnings Beat, Fee Income & Expenses Rise

KeyCorp’s KEY second-quarter 2018 earnings of 44 cents per share surpassed the Zacks Consensus Estimate of 42 cents. Also, this compared favorably with earnings of 36 cents recorded in the prior-year quarter.

Shares of KeyCorp have gained almost 2% in pre-market trading. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Stable net interest income and higher fee income drove the results. Further, a decline in provision for credit losses and improving loan and deposit balances acted as tailwinds. However, an increase in expenses was on the downside.

Net income from continuing operations was $464 million, up 18.1% from the prior-year quarter.

Revenues Up Marginally, Expenses Rise

Total revenues inched up 0.4% year over year to $1.65 billion. Also, the figure beat the Zacks Consensus Estimate of $1.59 billion.

Tax-equivalent net interest income (NII) was relatively stable year over year at $987 million. This included $28 million of purchase accounting accretion (PAA). Excluding this, NII improved year over year.

However, taxable-equivalent net interest margin (NIM) from continuing operations declined 11 basis points (bps) year over year to 3.19%. Notably, excluding PAA, NIM increased 13 bps from the year-ago quarter.

Non-interest income was $660 million, reflecting an increase of 1.1% from the year-ago quarter. The rise was mainly driven by higher investment banking and debt placement fees, and mortgage servicing fees. Excluding notable items, non-interest income grew 5.4% year over year to $624 million.

Non-interest expenses (excluding notable items) increased 3.3% year over year to $966 million. The rise was due to higher personnel costs, largely due to recent acquisitions and continued hiring.

Strong Balance Sheet

At the end of the second quarter, average total deposits were $104 billion, up 1.4% from the prior quarter. Average total loans were $88.6 billion, up 2% sequentially.

Credit Quality: A Mixed Bag

Net loan charge-offs, as a percentage of average loans, decreased 4 bps year over year to 0.27%. Provision for credit losses declined 3% year over year to $64 million.

However, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.65%, up 1 bp year over year. Further, KeyCorp’s allowance for loan and lease losses was $887 million, up 2% from the prior-year quarter.

Strong Capital Position

KeyCorp's tangible common equity to tangible assets ratio was 8.32% as of Jun 30, 2018, down from 8.56% as of Jun 30, 2017. However, Tier 1 risk-based capital ratio was 10.94%, up from 10.73% as of Jun 30, 2017.

The company’s estimated Basel III Common Equity Tier 1 ratio was 10.12% at the end of the quarter.

Share Repurchases

During the reported quarter, KeyCorp repurchased $126 million worth of shares as part of its 2017 capital plan.

Our Take

KeyCorp remains well positioned for revenue growth, given the rise in interest rates and improving loan and deposit balances. Further, tax rate cut will aid profitability to some extent. However, persistently increasing expenses, owing to investments in franchise and acquisitions, are likely to hurt bottom-line growth. Further, the company's significant exposure to risky loan portfolios remains a major concern.

KeyCorp Price, Consensus and EPS Surprise

 

KeyCorp Price, Consensus and EPS Surprise | KeyCorp Quote

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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 and Upcoming Release

Comerica CMA reported adjusted earnings per share of $1.90 in second-quarter 2018, up from the year-ago adjusted figure of $1.15. Including certain non-recurring items, earnings came in at $1.87. The Zacks Consensus Estimate was $1.62.

M&T Bank Corporation MTB reported net operating earnings of $3.29 per share in second-quarter 2018, surpassing the Zacks Consensus Estimate of $3.17. Also, the bottom line improved 38% year over year.

SunTrust Banks, Inc. STI is scheduled to report earnings on Jul 20.

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