Why Is KeyCorp (KEY) Up 6.3% Since the Last Earnings Report?

A month has gone by since the last earnings report for KeyCorp KEY. Shares have added about 6.3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

KeyCorp Beats on Q4 Earnings as Revenues Increase

KeyCorp’s fourth-quarter 2016 adjusted earnings of $0.31 per share outpaced the Zacks Consensus Estimate of $0.29. The figure was up 14.8% from the prior-year quarter.

Better-than-expected quarterly results indicate revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016). Further, the company reported impressive growth in loans and deposits. However, higher operating expenses and a rise in provision for credit losses were the downsides.

Including non-recurring merger-related charges of $198 million, Keycorp’s net income from continuing operations came in at $213 million, down 4.9% from the prior-year quarter.

For 2016, earnings of $0.80 per share lagged the Zacks Consensus Estimate of $1.11. Also, it was down 23.8% year over year. Net income from continuing operations was $753 million, down 15.6% from 2015.

Revenues Surge on First Niagara Deal, Expenses Increase

Total revenue for the quarter surged 43% year over year to $1.57 billion. Also, this compared favorably with the Zacks Consensus Estimate of $1.45 billion.

For 2016, revenues increased 18% year over year to $5.0 billion. Also, this was above the Zacks Consensus Estimate of $4.9 billion.

Tax-equivalent net interest income jumped 55.4% year over year to $948 million. The rise was attributable to benefits from the First Niagara acquisition and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 25 basis points (bps) year over year to 3.12%.

Non-interest income (excluding merger related charges) was $609 million, an increase of 25.6% from the year-ago quarter. A rise in all fee income components drove the surge.

Non-interest expense (excluding merger related charges) jumped 38.8% year over year to $1.01 billion due to a rise in both personnel as well as non-personnel expenses. Also, the quarter recorded higher merger-related charges.

Healthy Balance Sheet

As of Dec 31, 2016, average total deposits were $104.7 billion, up 10.3% from the prior quarter. Further, average total loans were $85.4 billion, up 9.9% from Jun 30, 2016.

Deterioration in Credit Quality

Net loan charge-offs, as a percentage of average loans, increased 9 bps year over year to 0.34%. Provision for credit losses increased 46.7% year over year to $66 million.

Also, KeyCorp’s allowance for loan and lease losses was $858 million, up 7.8% year over year. Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.79%, up 12 bps year over year.

Capital Ratios Deteriorate

KeyCorp's tangible common equity to tangible assets ratio was 8.09% as of Dec 31, 2016, down from 9.98% as of Dec 31, 2015. In addition, Tier 1 risk-based capital ratio was 10.95% versus 11.35% as of Dec 31, 2015.

The company’s estimated Basel III Tier 1 common ratio was 9.56% at the end of the quarter, down from 10.94% as of Dec 31, 2015.

Share Repurchases

During the reported quarter, KeyCorp repurchased $68 million worth of shares as part of its 2016 capital plan.

2017 Outlook

Management expects average loans and deposits grow in the range of 4 year over year.

Further, net interest income is anticipated to increase year over year and be in the range of $3.6-$3.7 billion. Further, net interest margin is projected to be the mid-2.95 range. These are based on the assumption of one more rate hike in mid-2017 and purchase accounting accretion trending lower on a quarterly basis.

Management expects investment banking debt placement fees to rise year over year as it continues to improve product offering and enhance capabilities. Non-interest income is expected to be in $2.3-$2.4 billion range, as the company continues to drive growth from its core businesses and the acquisition.

KeyCorp expects operating expenses (excluding merger-related charges) to be in the range of $3.65-$3.75 billion.

Further, cost savings (related to the First Niagara deal) of more than the target value of $400 million are anticipated to be accrued by mid-2017, with full run rate to be reflected in 2018 results. Therefore, by the end of the first six months of 2017, the company is likely to realize more than 50% of the value from cost savings.

Management expects the First Niagara deal to result in earnings accretion of approximately 5% in 2017. Also, management projects achieving $300 million worth of incremental revenues from synergies generated by the acquisition. This is likely to lower the company’s cash efficiency by 3% and improve return on tangible common equity by 2%.

Net charge-offs are anticipated to stay below the target range of 40-60 bps. However, the company expects relatively higher provisions.

The effective tax rate (GAAP basis) is likely to increase to 25-27%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.

KeyCorp Price and Consensus

 

KeyCorp Price and Consensus | KeyCorp Quote

VGM Scores

At this time, KeyCorp's stock has a poor Growth Score of 'F', however its momentum is doing a lot better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions indicates a downward shift. Interestingly the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.

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