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Muted Lending, Lower Rates to Hurt KeyCorp (KEY) Q3 Earnings

Zacks Equity Research

KeyCorp KEY is scheduled to report third-quarter 2019 results on Oct 17, before the opening bell. The quarter did not witness significant improvement in the lending scenario, particularly in the areas of commercial and industrial, which account for nearly 50% of KeyCorp’s average loan balances.

The Zacks Consensus Estimate for the company’s average total loans and average interest earning assets suggests slight rise from the prior quarter reported number. The consensus estimate for average total loans of $92 billion indicates growth of 1.3%.

Also, the consensus estimate for average interest earning assets of $130.2 billion suggests 1.8% rise on a sequential basis.

Soft loan growth, decline in interest rates (two rate cuts – in July and September) and flattening/inversion of the yield curve likely had an adverse impact on the company’s net interest income (NII) growth in the to-be-reported quarter. The Zacks Consensus Estimate for NII (tax-equivalent basis) for the third quarter is pegged at $994 million, indicating a rise of 0.5% from the prior-quarter reported figure.

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

Stable non-interest income: While dealmakers were active during the third 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, despite decent equity markets performance and the central banks’ accommodative stance, corporates seem to be shying away from equity issuances, given the global concerns. However, 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, are expected to have partially offset the woes.

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

Deterioration in asset quality: The consensus estimate for non-performing assets of $637 million indicates a 4.8% increase from the previous quarter. Likewise, the estimate for non-performing loans of $589 million suggests a 5% rise on a sequential basis.

Here is what our quantitative model predicts:

Chances of KeyCorp beating the Zacks Consensus Estimate in the third quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for KeyCorp is -1.09%.

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

KeyCorp Price and EPS Surprise


KeyCorp Price and EPS Surprise

KeyCorp price-eps-surprise | KeyCorp Quote

Notably, the Zacks Consensus Estimate for KeyCorp’s earnings for the to-be-reported quarter is pegged at 47 cents, which indicates 4.4% increase from the year-ago quarter. The consensus estimate for sales of $1.64 billion suggests nearly 2.6% rise.

Stocks to Consider

Here are a few finance stocks worth a look as they have the right combination of elements to post an earnings beat this quarter.

BNY Mellon BK is scheduled to release results on Oct 16. The company has an Earnings ESP of +0.11% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank Corporation MTB is +0.34% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 17.

The Earnings ESP for SLM Corporation SLM is +24.09% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Oct 23.

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