KeyCorp (KEY) Q1 Earnings Miss On Lower Revenues, Costs Dip

KeyCorp’s (NYSE:KEY) 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.

The stock fell nearly 3% in pre-market trading, indicating that investors not have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Results were adversely impacted by lower non-interest income, lower net interest margin, decline in deposit balance 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. The 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. The 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.

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

Capital Deployment Update

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

Concurrently, the company announced its new capital plan, beginning third-quarter 2019 through second-quarter 2020. The plan includes a share repurchase authorization worth $1 billion and a 9% hike in quarterly dividend, subject to approval of board of directors.

Our Take

KeyCorp remains well positioned for revenue growth, given the rise in interest rates and solid loan and deposit balances. Further, the company’s efforts to improve fee income are commendable.

However, persistently increasing expenses owing to investments in franchise and acquisitions, are likely to curb bottom-line growth. Further, the company's significant exposure to risky loan portfolios is a major concern.