Will Lower Interest Income Hurt KeyCorp's (KEY) Q3 Earnings?
Zacks Investment Research | Oct 17, 2017 08:36AM ET
KeyCorp’s (NYSE:KEY) third-quarter 2017 results, scheduled on Oct 19, are expected to show a decline in net interest income (NII). While this could majorly affect its earnings, an improvement in revenues from other segments should offset the adverse impact on earnings.
On a sequential basis, the quarter witnessed steady deceleration in home equity loan portfolio, while demand for commercial and industrial, and consumer loans rose. This is expected to lead to a rise in KeyCorp’s loan balance during the quarter. The Zacks Consensus Estimate for average loans of $87.3 billion reflects nearly 1% increase from the prior quarter.
Further, KeyCorp is projected to record a 1.3% rise in average earning assets as the Zacks Consensus Estimate for the to-be-reported quarter is $121.3 billion.
Despite these positive factors, KeyCorp is expected to witness a fall in NII owing to flatter yield curve for the major part of the third quarter. The Zacks Consensus Estimate for NII (tax equivalent basis) of $963 million shows a 2.4% decline on a sequential basis.
Other Factors to Influence Q3 Results
Modest non-interest income growth: KeyCorp’s third-quarter non-interest income will be positively impacted by increasing investment banking income, mainly driven by slightly higher debt placement fees. Also, trust and investment services income is anticipated to have risen as the performance of equity markets was relatively decent during the quarter.
However, growth in mortgage banking fees is expected to be relatively muted during the quarter owing to lower mortgage originations. Therefore, non-interest income is projected to record a marginal improvement.
Decline in expenses should support profitability: KeyCorp has been consistently streamlining operations, diversifying products and exiting unprofitable/non-core businesses. This is expected to keep overall non-interest expenses (excluding merger related charges) manageable. Also, management expects cost savings from the Fist Niagara deal to support the bottom line marginally.
Asset quality to worsen: As KeyCorp is projected to witness a rise in loans, a corresponding increase in provision for loan losses is expected. Further, the Zacks Consensus Estimate for non-performing asset of $602 million shows 8.3% increase from the last quarter. Also, non-performing loans is projected to be $560 million, a rise of 10.5% sequentially.
Here is what our quantitative model predicts:
Our proven model doesn’t conclusively predict that KeyCorp will be able to beat the Zacks Consensus Estimate as it does not have right combination of two key ingredients — positive Original post
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