KeyCorp’s KEY second-quarter 2024 adjusted earnings from continuing operations of 25 cents per share beat the Zacks Consensus Estimate by a penny. The bottom line, however, compared unfavorably with 27 cents earned in the prior-year quarter. The reported quarter included the FDIC special assessment charge of $5 million, but its impact on earnings was negligible.
The stock lost 2% in pre-market trading on deteriorating credit quality and spread income weakness concerns.
Results benefited from a rise in non-interest income, high rates, lower provisions and an improving loan balance. However, lower net interest income (NII) and a slight rise in expenses were the undermining factors. Further, higher deposit costs weighed on the net interest margin (NIM).
Net income from continuing operations attributable to common shareholders was $237 million, down 5.2% year over year. Our estimate for the metric was $231.1 million.
Revenues Decline, Expenses Rise Marginally
Quarterly total revenues (tax equivalent or TE) declined 4.3% year over year to $1.53 billion. However, the top line beat the Zacks Consensus Estimate of $1.52 billion.
NII (on a TE basis) declined 8.8% to $899 million. NIM (TE basis) from continuing operations decreased 8 basis points (bps) to 2.04%. While both metrics benefited from the re-investment of proceeds from maturing investment securities into higher-yielding ones, it was more than offset by a shift in the funding mix, lower loan balances because of balance sheet optimization efforts during 2023 and higher deposit costs. Our estimate for NII (FTE) and NIM was $890.6 million and 2.07%, respectively.
Non-interest income was $627 million, up 3%. The rise was largely attributable to higher trust and investment services income, commercial mortgage servicing fees and consumer mortgage income. Our estimate for the metric was $645.4 million.
Non-interest expenses increased marginally to $1.08 billion. This included the additional FDIC special assessment charge of $5 million. We projected the metric to be $1.1 billion.
Loans & Deposits
At the second-quarter end, average total deposits were $144.2 billion, up almost 1% from the prior quarter end. The rise was driven by growth in the retail certificate of deposit balances and solid commercial deposit balances. Our estimate for the metric was $143.5 billion.
Average total loans were $109 billion, down 1.9% sequentially. The decline was due to the company’s planned balance sheet optimization efforts. We had anticipated average total loans of $108.9 billion.
Credit Quality Weakens
Net loan charge-offs, as a percentage of average loans, rose 17 bps year over year to 0.34%. The allowance for loan and lease losses was $1.55 billion, up 4.5%.
Non-performing assets, as a percentage of period-end portfolio loans, other real estate-owned properties assets and other non-performing assets were 0.68%, up 29 bps year over year.
However, the provision for credit losses was $100 million, decreasing 40.1%. The decline reflected a more stable economic outlook and the impacts of KeyCorp’s balance sheet optimization efforts. We had expected the metric to be $91.7 million.
Capital Ratios Improve
KeyCorp's tangible common equity to tangible assets ratio was 5.2% as of Jun 30, 2024, up from 4.5% in the corresponding period of 2023. The Tier 1 risk-based capital ratio was 12.2%, up from 10.8%. The Common Equity Tier 1 ratio was 10.5%, up from 9.3% as of Jun 30, 2023.
Our Take
Decent loan balances and higher interest rates will likely support KeyCorp’s revenues in the near term, though rising funding costs continue to exert pressure. Weakening asset quality amid a tough macroeconomic backdrop is a major concern.
KeyCorp Price, Consensus and EPS Surprise
KeyCorp price-consensus-eps-surprise-chart | KeyCorp Quote
KeyCorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Major Banks
PNC Financial’s PNC second-quarter 2024 earnings per share of $3.39 surpassed the Zacks Consensus Estimate of $3.00. In the prior-year quarter, the company reported earnings per share of $3.36.
Results were aided by a rise in fee income, higher loan balance, and reduced expenses. However, a decline in NII and higher provisions for credit losses acted as spoilsports for PNC.
U.S. Bancorp’s USB second-quarter 2024 adjusted earnings per share (excluding the impact of notable items) of 98 cents beat the Zacks Consensus Estimate by 2%. However, the bottom line declined 12.5% from the prior-year quarter's level.
USB’s results have benefited from higher deposits, a rise in non-interest income and lower expenses. However, a decline in NII was a major headwind.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
