Can Loan Growth, Higher Rates Aid KeyCorp (KEY) Q2 Earnings?

KeyCorp KEY is slated to announce second-quarter 2018 results on Jul 19, before the opening bell. The company is expected to show some improvement in net interest income (NII), driven by higher interest rates, while the flattening of the yield curve is likely to hamper growth to some extent.

While the overall loan growth in the second quarter was not impressive, commercial and industrial loans witnessed modest growth. Notably, the Zacks Consensus Estimate for average total loans of $88.3 billion for the second quarter indicates growth of 1.5% sequentially.

Driven by loan growth, earning assets are also likely to rise. Consensus estimates for average interest earning assets of $123.4 billion for the to-be-reported quarter indicate an increase of 1.4% compared with the prior-quarter end.

Thus, KeyCorp’s NII, one of the main revenue sources, is expected to support earnings growth. The Zacks Consensus Estimate for NII (tax equivalent basis) of $975 million for the to-be-reported quarter reflects 2.4% increase on a sequential basis.

Let’s check out the other factors that are expected to influence KeyCorp’s Q2 performance:

Muted Non-Interest Income Growth: KeyCorp’s second-quarter non-interest income will likely benefit from a rise in service charge on deposits as deposit balances are expected to improve.

Despite some improvement in M&As during the second quarter, growth in investment banking fees is expected to remain muted due to lower debt placement activities.

Further, while the to-be-reported quarter has seen decent mortgage originations, mortgage banking fees are not expected to improve much because of seasonality along with a slowdown in refinancing activities due to higher rates.

Thus, because of the above-mentioned factors, non-interest income growth is expected to remain subdued in the second quarter.

Expenses Might Not Provide Much Support: While KeyCorp’s efforts to diversify products, reorganize operations and exit unprofitable/non-core businesses are likely to save costs, its continued investments in its franchise and inorganic growth strategies are expected to keep overall expenses at an elevated level.

Management expects to achieve the remaining part of the First Niagara cost savings of $50 million in Q2.

Asset Quality to Aid Results: The Zacks Consensus Estimate for non-performing asset of $551 million indicates a decline of 3.2% sequentially. Likewise, consensus estimates for non-performing loans of $522 million reflect a decrease of 3.5% from the prior quarter.

As KeyCorp is likely to witness rise in loans, a corresponding increase in provision for loan losses is expected. Overall, this is expected to be manageable.

Here is what our quantitative model predicts:

According to our quantitative model, chances of KeyCorp beating the Zacks Consensus Estimate in the second quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to be confident of an earnings surprise call.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for KeyCorp is +0.40%.

Zacks Rank: KeyCorp currently carries a Zacks Rank #2 (Buy), which, when combined with a positive ESP makes us reasonably confident of an earnings beat.

Notably, the Zacks Consensus Estimate for earnings for the to-be-reported quarter is 42 cents, which reflects a year-over-year improvement of 23.5%. However, the Zacks Consensus Estimate for sales of $1.59 billion indicates 2.1% decline from the prior-year quarter.

KeyCorp Price and EPS Surprise
 

KeyCorp Price and EPS Surprise | KeyCorp Quote

Other Stocks That Warrant a Look

Here are a few other stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat in their upcoming releases.

The Blackstone Group L.P. BX is scheduled to release results on Jul 19. It has an Earnings ESP of +3.70% and currently carries a Zacks Rank #3.

E*TRADE Financial Corporation ETFC has an Earnings ESP of +0.11% and presently carries a Zacks Rank of 3. The company is also slated to release results on Jul 19.

SunTrust Banks, Inc. STI is slated to release results on Jul 20. It has an Earnings ESP of +0.21% and currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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