Lower Interest Rates to Hurt KeyCorp's (KEY) Q1 Earnings

KeyCorp KEY is slated to announce first-quarter 2020 results on Apr 16, before the opening bell. While the lending backdrop was strong in the first two months of the quarter, the virus outbreak in March resulted in a drop in loan demand, as business and consumer activities came to a grinding halt.

Nevertheless, the overall lending scenario remained decent during the quarter, with commercial and industrial loans (accounting for roughly 50% of KeyCorp’s average loan balances) having offered considerable support.

The Zacks Consensus Estimate for the company’s average total loans and average earning assets suggests growth from the prior quarter’s reported figure. The consensus estimate for average total loans of $95.4 billion indicates growth of 1.9% sequentially. Also, the consensus estimate for average earning assets of $133 billion suggests a 0.6% rise from the prior quarter’s reported figure.

Despite modest growth in loans, KeyCorp’s net interest income (NII) growth is expected to have been muted in the to-be-reported quarter because of lower interest rates. The Zacks Consensus Estimate for NII on a fully tax-equivalent basis is pegged at $977 million for the first quarter, indicating a decline of 1% sequentially.

Notably, the Federal Reserve reduced interest rates to near-zero level in March to support the U.S. economy amid the coronavirus-induced slowdown. This is expected to have dampened the banks’ margins further.

Now, let’s check the other factors that are likely to have influenced KeyCorp’s first-quarter performance:

Non-interest income: Global M&A activity during the first quarter was significantly hampered due to the coronavirus outbreak. Thus, KeyCorp’s advisory fees are likely to have been negatively impacted.

Overall weak equity market performance during the quarter resulted in a decline in follow-up equity issuances, while IPOs were a bright spot. Debt issuances were muted, owing to soft loan demand. Thus, growth in KeyCorp’s investment banking fees might have been muted.

While growth in mortgage originations have remained muted in the first quarter, the Federal Reserve’s accommodative monetary policy and decline in mortgage rates drove refinancing activities. Thus, growth in mortgage banking income might have supported KeyCorp’s fee income to some extent.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped in saving costs in the past. However, owing to its inorganic growth strategies and increased investment in technology to strengthen digital offerings, overall expenses are expected to have remained elevated in the first quarter.

Asset quality: The consensus estimate for non-performing assets is pegged at $751 million for the to-be-reported quarter, which indicates a 5% increase from the previous quarter. Likewise, the estimate for non-performing loans of $635 million suggests a 10.1% rise on a sequential basis.

Here is what our quantitative model predicts:

Chances of KeyCorp beating the Zacks Consensus Estimate in the first quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

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

Earnings ESP: The Earnings ESP for KeyCorp is -4.17%.

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

The Zacks Consensus Estimate for KeyCorp’s earnings for the to-be-reported quarter is pegged at 33 cents, which suggests a decline of 17.5% from the prior-year reported number. The consensus estimate for sales of $1.56 billion suggests growth of 2.8% year over year.

KeyCorp Price and EPS Surprise

KeyCorp Price and EPS Surprise

KeyCorp price-eps-surprise | KeyCorp Quote

Stocks That Warrant a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat this earnings season, per our model.

BCB Bancorp, Inc. (NJ) BCBP is expected to release quarterly results soon. The company has an Earnings ESP of +4.17% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Carolina Financial Corporation CARO is +1.43% and it carries a Zacks Rank of 3 currently. The company is expected to report quarterly numbers in the coming days.

SB ONE BANCORP SBBX is likely to report quarterly earnings soon. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +1.56%.

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