KeyCorp (KEY) Q2 Earnings In Line, Revenues & Expenses Rise

KeyCorp’s (NYSE:KEY) second-quarter 2017 adjusted earnings of 34 cents per share were in line with the Zacks Consensus Estimate.

KeyCorp’s shares fell nearly 2.4% in pre-market trading, reflecting investors’ concern over rising provision for credit losses. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.

Results were supported by revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016) and higher interest rates. On the other hand, higher operating expenses and increase in provision for credit losses were the downsides. Notably, the company witnessed marginal loan growth while deposit balances declined.

Including merger-related charges of $43 million, net income from continuing operations came in at $393 million, up significantly from $193 million in the prior-year quarter.

First Niagara Deal Continues to Drive Revenues, Expenses Rise

Total revenue surged 52.1% year over year to $1.64 billion. Also, it surpassed the Zacks Consensus Estimate of $1.52 billion.

Tax-equivalent net interest income jumped 63.1% year over year to $987 million. The rise was attributable to benefits from the First Niagara acquisition, a rise in earning asset balances and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 54 basis points (bps) year over year to 3.30%.

Non-interest income (excluding merger related charges) was $653 million, an increase of 38.1% from the year-ago quarter. A rise in all fee income components drove the surge.

Non-interest expenses (excluding merger related charges) jumped 34.7% year over year to $951 million due to a rise in both personnel as well as non-personnel expenses. The quarter recorded a modest year-over-year fall in merger-related charges.

Loans Rise Marginally, Deposits Decline

At the end of the second quarter, average total deposits were $102.8 billion, down nearly 1% from the prior quarter. However, average total loans were $86.5 billion, up 0.4% sequentially.

Credit Quality: A Mixed Bag

Net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.31%. Provision for credit losses increased 26.9% year over year to $66 million. Further, KeyCorp’s allowance for loan and lease losses was $870 million, up 1.9% from the prior-year quarter.

However, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.64%, down 39 bps year over year.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 8.56% as of Jun 30, 2017, down from 9.95% as of Jun 30, 2016. In addition, Tier 1 risk-based capital ratio was 10.79% versus 11.41% as of Jun 30, 2016.

The company’s estimated Basel III Tier 1 common ratio was 9.97% at the end of the quarter, down from 11.10% as of Jun 30, 2016.

Share Repurchases

During the reported quarter, KeyCorp repurchased $94 million worth of shares as part of its 2016 capital plan.

Our Take

Restructuring initiatives undertaken by KeyCorp will be supported by its robust balance-sheet position. The company’s financials will continue to benefit from the synergies of the First Niagara transaction. Further, with gradual rise in interest rates and increasing loan demand, margin pressure is expected to ease in the coming quarters.

However, increased dependence on home equity and commercial real estate loans raises the exposure of the company’s profits to these avenues.

KeyCorp Price, Consensus and EPS Surprise

KeyCorp Price, Consensus and EPS Surprise | KeyCorp Quote

Keycorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Performance and Upcoming Release

U.S. Bancorp (NYSE:USB) reported earnings per share of 85 cents, beating the Zacks Consensus Estimate by a penny. Better-than-expected results reflect higher interest income. However, rise in provisions and escalating expenses were the headwinds.

Comerica Inc.’s (NYSE:CMA) adjusted earnings per share of $1.15 surpassed the Zacks Consensus Estimate of $1.07. Better-than-expected results were driven by higher revenues and lower expenses. Moreover, lower provisions and better credit quality were the tailwinds.

SunTrust Banks, Inc. (NYSE:STI) is scheduled to report earnings on Jul 21.

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