Low Rates, Weak Loan Demand to Hurt KeyCorp (KEY) Q3 Earnings

KeyCorp KEY is slated to announce third-quarter 2020 results on Oct 21, before the opening bell. During the quarter, the overall lending scenario was weak, with demand for commercial and industrial loans (accounting for roughly 50% of KeyCorp’s average loan balances) witnessing a marked decline.

The Zacks Consensus Estimate for average total loans and average earning assets suggests growth from the prior quarter. The consensus estimate for average total loans of $107.4 billion indicates marginal growth on a sequential basis. Also, the consensus estimate for average earning assets of $152.5 billion suggests a 2.5% rise from the prior quarter.

Thus, KeyCorp’s net interest income (NII) growth is expected to have improved in the to-be-reported quarter despite lower rates. The Zacks Consensus Estimate for NII on a fully tax-equivalent basis is pegged at $1.05 billion, indicating an increase of 2% sequentially. Yet, near-zero interest rates are likely to have resulted in contraction in the bank’s net interest margin (NIM) in the third quarter.

Also, for the third quarter, management expects average loan growth to be relatively stable on a sequential basis, reflecting consumer loan growth and lower commercial line utilization. Likewise, it expects deposits to remain stable sequentially. It estimates deposit costs to further decline approximately 15 basis points (bps).

Driven by a relatively stable balance sheet and modest NIM improvement, the company expects NII to be up in low-single digits from the second quarter.

Other Factors at Play

Non-interest Income: Deal making and IPO activities rebounded during the third quarter. Further, a substantial rise was witnessed in equity and debt issuances. Thus, these are likely to have supported KeyCorp’s investment banking fees to some extent. Also, given heightened market volatility and rise in client activities, trading income is likely to have risen. The consensus estimate for investment banking and capital markets income of $146 million indicates a fall of 6.4% sequentially.

Historically low mortgage rates during the quarter are expected to have resulted in a significant rise in refinancing activity, with mortgage originations also showing marked improvement. The Zacks Consensus Estimate for consumer mortgage income of $62 million remains stable sequentially. The consensus estimate for mortgage servicing fees of $13.5 million suggests a 12.5% rise.

Moreover, the Zacks Consensus Estimate for trust and investment services income suggests rise of 3.3% from the prior quarter.

The consensus estimate for total non-interest income of $660 million implies a decrease of 6.4% on a sequential basis.

Management anticipates non-interest income to be down in high-single digits on a sequential basis. This reflects lower operating lease gains and return to more normal level of activity in consumer mortgage.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses helped it in saving costs in the past. The trend is expected to have continued in the third quarter.

The company projects non-interest expenses to be down in low-single digits sequentially.

Asset Quality: As KeyCorp is likely to have built some additional loan loss reserves, mainly due to the worsening and uncertain macro-economic backdrop, provisions are expected to have risen in the third quarter.

Further, the consensus estimate for non-performing loans of $1.03 billion suggests a 35% rise on a sequential basis.

Management anticipates net charge-offs to be at the lower end of the 50-60 bps range.

What the Zacks Model Unveils

Our proven model shows that KeyCorp has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

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 +1.77%.

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

For the third quarter, the Zacks Consensus Estimate for earnings has moved 25.9% north to 34 cents per share over the past 30 days. The estimated figure suggests a 29.2% fall from the year-ago reported number.  However, the consensus estimate for sales of $1.7 billion indicates 4.5% growth from the year-ago quarter.

Other Bank Stocks Worth a Look

Here are some other bank stocks that you may want to consider as these have the right combination of elements to post an earnings beat this earnings season.

The Earnings ESP for Regions Financial RF is +3.31% and the company presently carries a Zacks Rank #3. It is scheduled to report quarterly numbers on Oct 20.

Huntington Bancshares HBAN is set to release earnings figures on Oct 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +3.47%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hilltop Holdings Inc. HTH is slated to report quarterly numbers of Oct 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +21.64%.

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