KeyCorp (KEY) Posts In-Line Q4 Earnings, Revenues Increase

KeyCorp’s (NYSE:KEY) fourth-quarter 2017 adjusted earnings of 36 cents per share came in line with the Zacks Consensus Estimate. Also, this compares favorably with 31 cents recorded in the prior-year quarter.

Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved on a year-over-year basis aided by revenue synergies from the First Niagara Financial Group acquisition deal (completed in August 2016). Further, a decline in provision for credit losses and improving deposits acted as tailwinds. On the other hand, decrease in loans was on the downside.

Including merger-related charges and the impact of tax reform, net income from continuing operations came in at $181 million or 17 cents per share. This was 15% down from $213 million or 20 cents per share in the prior-year quarter.

For 2017, earnings of $1.12 per share lagged the Zacks Consensus Estimate of $1.31. However, earnings were up 63.8% year over year. Further, net income from continuing operations was $1.2 billion, reflecting a 59.3% jump from 2016.

Higher Rates Drive Revenues, Expenses Remain Stable

Total revenues grew 2.7% year over year to $1.61 billion. Further, revenues surpassed the Zacks Consensus Estimate of $1.58 billion.

For 2017, revenues increased 25.6% year over year to $6.31 billion. Also, revenues came in above the Zacks Consensus Estimate of $6.25 billion.

Tax-equivalent net interest income went up marginally year over year to $952 million. The rise was attributable to benefits from low deposit betas and elevated interest rates which got partially offset due to the change in funding mix into certificates of deposit. However, taxable-equivalent net interest margin from continuing operations declined 3 basis points (bps) year over year to 3.09%.

Non-interest income was $656 million, reflecting an increase of 6.1% from the year-ago quarter. A rise in investment banking and debt placement fees, operating lease income and other leasing gains, and consumer mortgage income primarily drove the increase. However, it was partially offset by a decline in other income.

Non-interest expenses (excluding merger related charges) remained unchanged year over year at $1.01 billion. The cost savings from the First Niagara acquisition was offset by expenses relating to investments and acquisitions, including Cain Brothers and higher operating lease expense.

Loans Decline Marginally & Deposits Rise

At the end of the fourth quarter, average total deposits were $103.8 billion, up 0.7% from the prior quarter. However, average total loans were $86 billion, down 0.9% sequentially.

Credit Quality: A Mixed Bag

Net loan charge-offs, as a percentage of average loans, decreased 10 bps year over year to 0.24%. Provision for credit losses declined 25.8% year over year to $49 million.

Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.62%, down 17 bps year over year.

However, KeyCorp’s allowance for loan and lease losses was $877 million, up 2.2% from the prior-year quarter.

Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 8.23% as of Dec 31, 2017, up from 8.09% as of Dec 31, 2016. In addition, Tier 1 risk-based capital ratio was 10.93% versus 10.89% as of Dec 31, 2016.

The company’s estimated Basel III Tier 1 common ratio was 10.08% at the end of the quarter, up from 9.54% as of Dec 31, 2016.

Share Repurchases

During the reported quarter, KeyCorp repurchased $199 million worth of shares as part of its 2017 capital plan.

Our Take

KeyCorp remains well positioned for growth in revenues given a rising rate environment and a rise in loan and deposit balances. Improving credit quality and enhanced capital deployment activities are the other positives. Further, the corporate tax rate cut will aid profitability to some extent. However, elevated expenses owing to investments in franchise and acquisitions are likely to hurt bottom-line growth.

KeyCorp Price and EPS Surprise

Keycorp currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks and Upcoming Release

Despite the trading slump, loan growth and an impressive investment banking performance drove Bank of America’s (NYSE:BAC) fourth-quarter 2017 earnings of 47 cents per share, which outpaced the Zacks Consensus Estimate of 44 cents. Also, the figure was 21% higher than the prior-year quarter. Notably, the results exclude a one-time charge of 27 cents related to the tax act.

Comerica Inc. (NYSE:CMA) pulled off a positive earnings surprise of 5.8% in fourth-quarter 2017. Adjusted earnings per share of $1.28 surpassed the Zacks Consensus Estimate of $1.21. Also, the bottom line compares favorably with the prior-year quarter figure of 99 cents.

SunTrust Banks, Inc. (NYSE:STI) is scheduled to report earnings on Jan 19. It currently carries a Zacks Rank of 2 and has an Earnings ESP of +0.68%.

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