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KeyCorp (KEY) Down 3.2% Since Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for KeyCorp (KEY - Free Report) . Shares have lost about 3.2% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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 catalysts.
KeyCorp's Q2 Earnings in Line, Revenues & Expenses Rise
KeyCorp’s second-quarter 2017 adjusted earnings of 34 cents per share were in line with the Zacks Consensus Estimate.
Results were supported by revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016) and higher interest rates. On the other hand, higher operating expenses and increase in provision for credit losses were the downsides. Notably, the company witnessed marginal loan growth while deposit balances declined.
Including merger-related charges of $43 million, net income from continuing operations came in at $393 million, up significantly from $193 million in the prior-year quarter.
First Niagara Deal Continues to Drive Revenues, Expenses Rise
Total revenue surged 52.1% year over year to $1.64 billion. Also, it surpassed the Zacks Consensus Estimate of $1.52 billion.
Tax-equivalent net interest income jumped 63.1% year over year to $987 million. The rise was attributable to benefits from the First Niagara acquisition, a rise in earning asset balances and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 54 basis points (bps) year over year to 3.30%.
Non-interest income (excluding merger related charges) was $653 million, an increase of 38.1% from the year-ago quarter. A rise in all fee income components drove the surge.
Non-interest expenses (excluding merger related charges) jumped 34.7% year over year to $951 million due to a rise in both personnel as well as non-personnel expenses. The quarter recorded a modest year-over-year fall in merger-related charges.
Loans Rise Marginally, Deposits Decline
At the end of the second quarter, average total deposits were $102.8 billion, down nearly 1% from the prior quarter. However, average total loans were $86.5 billion, up 0.4% sequentially.
Credit Quality: A Mixed Bag
Net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.31%. Provision for credit losses increased 26.9% year over year to $66 million. Further, KeyCorp’s allowance for loan and lease losses was $870 million, up 1.9% from the prior-year quarter.
However, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.64%, down 39 bps year over year.
Capital Ratios Deteriorate
KeyCorp's tangible common equity to tangible assets ratio was 8.56% as of Jun 30, 2017, down from 9.95% as of Jun 30, 2016. In addition, Tier 1 risk-based capital ratio was 10.79% versus 11.41% as of Jun 30, 2016.
The company’s estimated Basel III Tier 1 common ratio was 9.97% at the end of the quarter, down from 11.10% as of Jun 30, 2016.
Share Repurchases
During the reported quarter, KeyCorp repurchased $94 million worth of shares as part of its 2016 capital plan.
2017 Outlook
Management expects loan growth to exceed deposit growth with average loans growing in the low end of the $87–$88 billion range. Moreover, average deposits are expected to be in the range of $102.5–$103 billion.
Further, net interest income is anticipated to increase and be in the range of $3.8–$3.9 billion. This is based on the assumption of no more rate hikes in 2017 and purchase accounting accretion trending lower.
Purchase accounting accretion is expected to decline by $5 million each in the remaining two quarters of 2017, leading to accretion of nearly $100 million for the remaining half of the year.
Non-interest income is expected to be in the range of $2.35–$2.45 billion, 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 $3.7–$3.8 billion. This includes the impact of merchant services and the HelloWallet acquisition.
Further, cost savings (related to the First Niagara deal) of $450 million are anticipated to be reached by early 2018.
Given the increase in cost savings target from the First Niagara deal, management expects a proportional rise in merger related charges from original projection of $550 million.
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 to average loans 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 26–28%.
Thus, in the long run, management expects to continue to generate positive operating leverage, lower the cash efficiency ratio to below 60% and produce a return on tangible common equity of 13–15%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
At this time, the stock has a poor Growth Score of F, however its Momentum is doing a bit better with a C. Following the exact same course, the stock was allocated also a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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KeyCorp (KEY) Down 3.2% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for KeyCorp (KEY - Free Report) . Shares have lost about 3.2% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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 catalysts.
KeyCorp's Q2 Earnings in Line, Revenues & Expenses Rise
KeyCorp’s second-quarter 2017 adjusted earnings of 34 cents per share were in line with the Zacks Consensus Estimate.
Results were supported by revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016) and higher interest rates. On the other hand, higher operating expenses and increase in provision for credit losses were the downsides. Notably, the company witnessed marginal loan growth while deposit balances declined.
Including merger-related charges of $43 million, net income from continuing operations came in at $393 million, up significantly from $193 million in the prior-year quarter.
First Niagara Deal Continues to Drive Revenues, Expenses Rise
Total revenue surged 52.1% year over year to $1.64 billion. Also, it surpassed the Zacks Consensus Estimate of $1.52 billion.
Tax-equivalent net interest income jumped 63.1% year over year to $987 million. The rise was attributable to benefits from the First Niagara acquisition, a rise in earning asset balances and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 54 basis points (bps) year over year to 3.30%.
Non-interest income (excluding merger related charges) was $653 million, an increase of 38.1% from the year-ago quarter. A rise in all fee income components drove the surge.
Non-interest expenses (excluding merger related charges) jumped 34.7% year over year to $951 million due to a rise in both personnel as well as non-personnel expenses. The quarter recorded a modest year-over-year fall in merger-related charges.
Loans Rise Marginally, Deposits Decline
At the end of the second quarter, average total deposits were $102.8 billion, down nearly 1% from the prior quarter. However, average total loans were $86.5 billion, up 0.4% sequentially.
Credit Quality: A Mixed Bag
Net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.31%. Provision for credit losses increased 26.9% year over year to $66 million. Further, KeyCorp’s allowance for loan and lease losses was $870 million, up 1.9% from the prior-year quarter.
However, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.64%, down 39 bps year over year.
Capital Ratios Deteriorate
KeyCorp's tangible common equity to tangible assets ratio was 8.56% as of Jun 30, 2017, down from 9.95% as of Jun 30, 2016. In addition, Tier 1 risk-based capital ratio was 10.79% versus 11.41% as of Jun 30, 2016.
The company’s estimated Basel III Tier 1 common ratio was 9.97% at the end of the quarter, down from 11.10% as of Jun 30, 2016.
Share Repurchases
During the reported quarter, KeyCorp repurchased $94 million worth of shares as part of its 2016 capital plan.
2017 Outlook
Management expects loan growth to exceed deposit growth with average loans growing in the low end of the $87–$88 billion range. Moreover, average deposits are expected to be in the range of $102.5–$103 billion.
Further, net interest income is anticipated to increase and be in the range of $3.8–$3.9 billion. This is based on the assumption of no more rate hikes in 2017 and purchase accounting accretion trending lower.
Purchase accounting accretion is expected to decline by $5 million each in the remaining two quarters of 2017, leading to accretion of nearly $100 million for the remaining half of the year.
Non-interest income is expected to be in the range of $2.35–$2.45 billion, 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 $3.7–$3.8 billion. This includes the impact of merchant services and the HelloWallet acquisition.
Further, cost savings (related to the First Niagara deal) of $450 million are anticipated to be reached by early 2018.
Given the increase in cost savings target from the First Niagara deal, management expects a proportional rise in merger related charges from original projection of $550 million.
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 to average loans 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 26–28%.
Thus, in the long run, management expects to continue to generate positive operating leverage, lower the cash efficiency ratio to below 60% and produce a return on tangible common equity of 13–15%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
KeyCorp Price and Consensus
KeyCorp Price and Consensus | KeyCorp Quote
VGM Scores
At this time, the stock has a poor Growth Score of F, however its Momentum is doing a bit better with a C. Following the exact same course, the stock was allocated also a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.