KeyCorp (KEY) Down 0.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for KeyCorp (KEY). Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is KeyCorp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

KeyCorp Q1 Earnings Miss Estimates on Lower Revenues, Costs Dip

KeyCorp’s first-quarter 2019 adjusted earnings of 40 cents per share missed the Zacks Consensus Estimate of 42 cents. However, the figure compared favorably with earnings of 38 cents recorded in the prior-year quarter.

Results were adversely impacted by lower non-interest income, lower net interest margin, a decline in deposit balances and deterioration in credit quality. However, higher interest income, slight loan growth and fall in operating expenses acted as tailwinds.

After taking into consideration certain non-recurring items related to efficiency initiative, net income from continuing operations was $386 million or 38 cents per share compared with $401 million or 38 cents per share in the prior-year quarter.

Revenues & Expenses Decline

Total revenues were down 2.1% year over year to $1.52 billion. Also, the figure lagged the Zacks Consensus Estimate of $1.60 billion.

Tax-equivalent net interest income increased 3.5% year over year to $985 million. This included $22 million of purchase accounting accretion. This rise was driven by higher interest rates and increase in earning asset balances.

Taxable-equivalent net interest margin from continuing operations decreased 2 basis points (bps) year over year to 3.13%.

Non-interest income was $536 million, declining 10.8% from the year-ago quarter. This fall was mainly due to lower trust and investment services income, service charges on deposit accounts, and investment banking and debt placement fees.

Non-interest expenses decreased 4.3% year over year to $963 million. The decline was largely attributable to the company’s efficiency initiative efforts across the franchise.

At the end of the first quarter, average total deposits were $107.6 billion, down slightly from the prior quarter. Average total loans were $89.6 billion, up marginally on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, increased 4 bps year over year to 0.29%. Also, provision for credit losses increased 1.6% to $62 million.

Further, KeyCorp’s allowance for loan and lease losses was $883 million, up marginally 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 0.66%, up 2 bps.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 8.43% as of Mar 31, 2019, up from 8.22% as of Mar 31, 2018. Also, Tier 1 risk-based capital ratio was 10.97%, up from 10.82% as of Mar 31, 2018.

The company’s estimated Basel III Common Equity Tier 1 ratio was 9.84% at the end of the quarter.

Share Repurchases

During the reported quarter, KeyCorp repurchased $199 million worth of shares as part of its 2018 capital plan.

2019 Outlook (includes impact of Laurel Road acquisition)

Management expects average loans to be in the range of $90-$91 billion, up from 2018-level. Further, average deposits are expected to increase year over year and be in the range of $108-$109 billion.

NII (FTE basis) is anticipated to remain relatively stable or increase marginally to the $4-$4.1 billion range. This is based on the assumption of no interest rate hikes this year. NIM is expected to remain relatively stable with the 2018 level.

Similarly, non-interest income is expected to remain relatively stable or increase marginally to the range of $2.5-$2.6 billion. The rise is expected to be driven by growth in most of its core fee-based businesses, with growth in investment banking and debt placement business to continue.

On the cost front, non-interest expenses are expected to be $3.85-$3.95 billion (includes realization of $200 million of cost savings in the second half of 2019). Notably, the outlook includes the impact of the Laurel Road acquisition, which adds roughly $50 million to the range. Further, the company expects to achieve cash efficiency ratio of 54-56% by the second half of 2019.

NCOs rate is expected to be lower than the target of 40-60 bps. Also, provisions are anticipated to increase marginally and exceed NCOs, given the loan growth.

The effective tax rate (GAAP basis) is likely to be 18-19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, KeyCorp has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, KeyCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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