KeyCorp (KEY) Q3 Earnings Beat Estimates As Revenues Rise

KeyCorp’s (NYSE:KEY) third-quarter 2019 adjusted earnings of 48 cents per share surpassed the Zacks Consensus Estimate of 47 cents. Also, the figure reflects an improvement of 6.7% from the prior-year quarter.

The stock rose nearly 1.6% in early market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Results benefited from an improvement in non-interest income and a decline in expenses. Moreover, growth in loans and deposit balances was a tailwind. However, lower net interest income and significantly higher provisions were the undermining factors.

After taking into consideration certain non-recurring items, net income from continuing operations was $383 million or 38 cents per share, down from $468 million or 45 cents per share in the prior-year quarter.

Revenues Improve, Expenses Decline

Total revenues were up 1.7% year over year to $1.62 billion. However, the figure lagged the Zacks Consensus Estimate of $1.64 billion.

Tax-equivalent net interest income declined 1.3% year over year to $980 million. The decline was due to lower net interest margin (NIM) and loan fees, partially offset by higher earning asset balances.

Taxable-equivalent net interest margin from continuing operations decreased 18 basis points (bps) year over year to 3.00%.

Non-interest income was $650 million, improving 6.7% year over year. The rise was primarily driven by an increase in almost all components of fee revenues, except for corporate-owned life insurance.

Non-interest expenses declined 2.6% year over year to $939 million. The decrease reflects the successful implementation of the company’s expense initiatives and the elimination of FDIC surcharge, partially offset by expenses from the Laurel Road acquisition.

At the end of the third quarter, average total deposits were $110.3 billion, up marginally from the prior quarter. Average total loans were $92 billion, up 1.3% on a sequential basis.

Credit Quality Worsens

Net loan charge-offs, as a percentage of average loans, grew 58 bps year over year to 0.85%. Also, provision for credit losses rose significantly to $200 million.

Further, KeyCorp’s allowance for loan and lease losses was $893 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 0.77%, up 2 bps.

Capital Ratios Mixed

KeyCorp's tangible common equity to tangible assets ratio was 8.58% as of Sep 30, 2019, up from 8.05% as of Sep 30, 2018. However, Tier 1 risk-based capital ratio was 10.96%, down from 11.11%.

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Share Repurchase Update

During the reported quarter, KeyCorp repurchased $248 million worth of shares as part of its 2019 capital plan.

Our Take

Decent loan and deposit growth (as witnessed in the third quarter) is expected to support revenue growth amid the Federal Reserve’s accommodative stance. Despite a decline in costs in the third quarter, the company’s overall expenses are expected to remain elevated because of its investments in franchise, technological upgrades and inorganic growth strategy.