Why Is KeyCorp (KEY) Up 7.2% Since Last Earnings Report?

A month has gone by since the last earnings report for KeyCorp (KEY). Shares have added about 7.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KeyCorp due for a pullback? 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 Q4 Earnings Top as Revenues Rise, Costs Fall

KeyCorp’s fourth-quarter 2018 adjusted earnings of 48 cents per share surpassed the Zacks Consensus Estimate by a penny. Also, the figure compared favorably with earnings of 36 cents recorded in the prior-year quarter.

Improvement in net interest income and a decline in expenses drove the results. Further, loans and deposits witnessed growth and capital ratios improved. However, higher provision for credit losses and a decrease in fee income were the undermining factors.

After taking into consideration certain non-recurring items, net income from continuing operations was $459 million or 45 cents per share, up from $181 million or 17 cents per share in the prior-year quarter.

In 2018, earnings of $1.70 per share increased 51.7% year over year. Net income from continuing operations (GAAP basis) was $1.79 billion, up 47.1% from the prior year.

Revenues Improve, Expenses Decline

Total revenues in the reported quarter were up 2.8% year over year to $1.65 billion. Also, the figure beat the Zacks Consensus Estimate of $1.63 billion.

In 2018, total revenues were $6.46 billion, up 2.3% year over year. However, the figure surpassed the Zacks Consensus Estimate of $6.41 billion.

Tax-equivalent net interest income increased 5.9% year over year to $1 billion. This included $23 million of purchase accounting accretion. Also, taxable-equivalent net interest margin from continuing operations increased 7 bps year over year to 3.16%.

Non-interest income was $645 million, reflecting a fall of 1.7% from the year-ago quarter. The decline was mainly due to lower cards and payments income, trust and investment services income and investment banking and debt placement fees.

Non-interest expenses decreased 7.8% year over year to $1.01 billion. The decline was due to a fall in both personnel costs and non-personnel expenses.

Loans & Deposits Rise

At the end of the fourth quarter, average total deposits were $108 billion, up 2.2% from the prior quarter. Average total loans were $89.3 billion, up nearly 1% on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.27%. Provision for credit losses increased 20.4% to $59 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 0.64%, up 2 bps year over year.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 8.30% as of Dec 31, 2018, up from 8.23% as of Dec 31, 2017. Also, Tier 1 risk-based capital ratio was 11.07%, up from 11.01% as of Dec 31, 2017. The company’s estimated Basel III Common Equity Tier 1 ratio was 9.92% at the end of the quarter.

Share Repurchases

During the reported quarter, KeyCorp repurchased $278 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 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 also 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 cost front, non-interest expenses are expected to be in the range of $3.85-$3.95 billion (includes realization of $200 million of cost savings in 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 targets to achieve cash efficiency ratio of 54-56% by the second half.

NCOs rate is expected to be lower than the target range 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?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, KeyCorp has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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

KeyCorp has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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