Weak Loan Growth, Low Rates To Mar KeyCorp (KEY) Q4 Earnings

KeyCorp (NYSE:KEY) is slated to announce fourth quarter and 2019 results on Jan 23, before the opening bell. The overall lending scenario was weak during the quarter, particularly in the areas of commercial and industrial (C&I), which account for roughly 50% of the bank’s average loan balances.

The Zacks Consensus Estimate for the company’s average total loans and average earning assets suggests slight rise from the prior-quarter reported number. The consensus estimate for average total loans of $92.9 billion indicates growth of 1.1%. Also, the consensus estimate for average earning assets of $131.1 billion suggests 0.5% rise on a sequential basis.

Management expects average loans to be up in the low-single-digit range, driven by growth in C&I loans along with continued rise in consumer loan balances. Further, it expects average deposits to be stable on a sequential basis.

Soft loan growth and decline in interest rates likely had an adverse impact on KeyCorp’s net interest income (NII) growth in the to-be-reported quarter. The Zacks Consensus Estimate for NII on a fully tax-equivalent (FTE) basis is $985 million, indicating a rise of 0.5% from the prior-quarter reported figure.

Likewise, the company projects NII (FTE basis) to be stable on a sequential basis.

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

Slight rise in non-interest income: While dealmakers were active during the fourth quarter, global deal value and volume declined due to several geopolitical concerns. Thus, the company’s advisory fees are likely to have been negatively impacted. Nonetheless, the strong M&A deal pipeline from the previous quarters might have offered some respite.

Further, decent equity markets performance and the central banks’ accommodative stance are likely to have led corporates to equity issuances. Also, debt issuances were decent, given the lower interest rates in the to-be-reported quarter. Thus, KeyCorp’s investment banking fees might have recorded a slight improvement.

Also, mortgage banking business is expected to have provided some support to KeyCorp’s fee income. While concerns like dismal home equity loan growth and fall in home buying appetite continue to hurt mortgage banking fees, lower mortgage rates, which drove the refinancing activities and originations, are expected to have partially offset the woes.

Management expects non-interest income to increase in the low-single-digit range. The rise is likely to be driven by growth in most of the core fee-based businesses, with growth in investment banking and debt placement business expected to continue.

Increase in operating expenses: KeyCorp’s efforts to diversify products, reorganize operations and exit unprofitable/non-core businesses have helped in saving costs. However, its increased investment in technology to strengthen digital offerings and inorganic growth strategies have probably led to rise in overall expenses.

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The company expects non-interest expenses to be up in the low-single-digit range.

Deterioration in asset quality: The consensus estimate for non-performing assets of $727 million indicates a 2.3% increase from the previous quarter. Likewise, estimates for non-performing loans of $599 million suggest a 2.4% rise on a sequential basis.

Management expects net charge-offs (NCOs) (excluding fraud loss impact) to remain unchanged from the prior-quarter level. Also, provisions are anticipated to rise marginally and exceed NCOs, backed by loan growth.

Here is what our quantitative model predicts:

Chances of KeyCorp beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP Filter .

Earnings ESP: The Earnings ESP for KeyCorp is -0.26%.

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