KeyCorp KEY remains well-positioned for top-line growth on the back of strategic acquisitions, restructuring initiatives, solid loans and deposit balances as well as higher rates, while funding costs weigh on it to some extent. Elevated expenses and weakening asset quality remain concerns.
KEY's Growth Catalysts
KEY’s solid loan growth has contributed to top-line expansion in the past several years. Though tax-equivalent revenues dipped in 2023 and in the first half of 2024, the metric reflected a compound annual growth rate (CAGR) of 0.3% over the last six years ended 2023.
Loans and deposits witnessed a CAGR of 4.3% and 6.8% over the four years ended 2023, respectively. While loans declined, deposits witnessed year-over-year growth during the first six months of 2024. Management anticipates gradual stabilization and potential growth in the second half of 2024. Decent loan demand, solid pipelines and the company’s initiatives to boost fee income will likely bolster top-line expansion. While we project TE total revenues to experience a marginal dip in 2024, the metric is expected to rebound in 2025 and 2026, with growth of 11.2% and 6%, respectively.
The Federal Reserve is likely to keep interest rates high in the near term. Given the high-rate scenario and decent loan growth, KeyCorp’s net interest margin (NIM) will likely grow while higher funding costs will weigh on it. Though the metric declined in 2023 and in the first six months of 2024, due to rising funding costs, it is expected to improve in the near term on account of higher rates and improving deposit mix. Moreover, the recent announcement of the Bank of Nova Scotia’s intention to acquire a 14.9% stake in the company will enhance the capital availability, thus enabling loan portfolio restructuring to aid NIM expansion in 2025 and 2026. We estimate NIM to be 2.18%, 2.52% and 2.60% in 2024, 2025 and 2026, respectively.
Furthermore, KeyCorp’s business restructuring initiatives are encouraging. The company acquired GradFin in 2022 to solidify its digital offering capabilities. In 2021, it had acquired XUP Payments, a B2B-focused digital platform, and AQN Strategies, a data analytics-driven consultancy firm.
These buyouts and expansion initiatives are likely to further KeyCorp’s revenue diversification and market share. The company remains optimistic about pursuing such opportunistic buyouts in entrepreneurial niche businesses, instead of depository acquisitions.
Moreover, KeyCorp has been consolidating its branch network to address the rising demand for digital banking services, with management seeking opportunities to expand its footprint in strategically lucrative locations. Thus, the company’s fee income growth is likely to continue going forward. We project total non-interest income to witness a 3.8% CAGR by 2026.
What's Slowing KEY Down?
KeyCorp’s escalating expense base remains a challenge. The metric experienced a 3.6% CAGR over the five years ended 2023. The increase was attributed to higher personnel costs. Though the trend reversed in the first half of 2024, overall costs are expected to stay elevated in the near term amid the ongoing investments in franchise, technological upgrades and inorganic growth initiatives. Though we estimate total non-interest expenses to decline 5.4% in 2024, the same will rise 4.8% and 2.6% in 2025 and 2026, respectively.
Weak asset quality is another headwind for KEY. The volatile trend recorded by the company’s provisions and net-charge offs (NCOs) is a concern. While provisions dipped in 2023 and the first half of 2024, NCOs continued to rise. A tough macroeconomic backdrop is likely to put pressure on asset quality going forward. Per our estimates, provisions are expected to decline in 2024, while NCOs are expected to rise 48.6% on a year-over-year basis.
KeyCorp currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have rallied 18.5%, underperforming the industry’s growth of 20.9%.
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Banking Stocks Worth Considering
Some better-ranked major bank stocks worth a look are JPMorgan Chase & Co. JPM and State Street Corp. STT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Estimates for JPM’s current-year earnings have been revised marginally upward in the past month. The company’s shares have increased 20.4% over the past six months.
Estimates for STT’s current-year earnings have been revised marginally upward in the past 30 days. The company’s shares have risen 17.5% over the past six months.
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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.
