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Why Is KeyCorp (KEY) Up 3.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for KeyCorp (KEY). Shares have added about 3.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KeyCorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

KeyCorp Q2 Earnings Beat Estimates on Higher Fee Income

KeyCorp’s second-quarter 2021 earnings of 72 cents per share handily surpassed the Zacks Consensus Estimate of 55 cents. The bottom line improved substantially from 16 cents earned in the prior-year quarter.

Results benefited from a rise in non-interest income, higher loan and deposit balances, and provision benefit. However, lower rates and increase in operating expenses were the undermining factors.

Net income from continuing operations attributable to common shareholders was $698 million, up significantly from $159 million recorded in the year-ago quarter.

Revenues Improve & Expenses Rise

Total revenues grew 3.3% year over year to $1.77 billion. The top line beat the Zacks Consensus Estimate of $1.73 billion.

Net interest income (on tax-equivalent basis) declined marginally year over year to $1.02 billion. The fall was due lower NIM, partially offset by higher earning asset balances.

Taxable-equivalent NIM from continuing operations contracted 24 basis points (bps) to 2.52%.

Non-interest income was $750 million, growing 8.4%. The upswing was largely driven by increase in investment banking and debt placement fees, commercial mortgage servicing fees, service charges on deposit accounts, and cards and payments income.

Non-interest expenses jumped 6.2% to $1.08 billion. The increase was mainly due to higher personnel costs and marketing expenses.

At the second-quarter end, average total deposits were $144.3 billion, up 4.8% from the prior quarter. Average total loans were $100.8 billion, up slightly.

Credit Quality Improves

Net loan charge-offs, as a percentage of average loans, decreased 27 bps year over year to 0.09%. Allowance for loan and lease losses was $1.22 billion, down 28.6%.

Provision for credit losses was a net benefit of $222 million against a provision of $482 million in the prior-year quarter. Provision benefit was mainly due to $244 million reserve release, which was largely driven by continued improvement in the economic outlook.

Non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other non-performing assets were 0.73%, down 16 bps.

Capital Ratios Mixed

KeyCorp's tangible common equity to tangible assets ratio was 7.4% as of Jun 30, 2021, down from 7.6% in the corresponding period of 2020. Tier 1 risk-based capital ratio was 11.3%, up from 10.5% in the prior-year quarter.

Share Repurchase Updates

During the quarter, KeyCorp repurchased shares worth $300 million.

2021 Outlook

Management expects average loan balances to be stable, reflecting continued momentum in consumer loan portfolios, the impact of paycheck protection program (PPP) and pick-up in commercial loan growth in the second half of the year. Deposits are expected to increase by high-single digits, up from the prior guidance of growth in mid-single digit rate.

Tax-equivalent NII (including ongoing participation in PPP) is expected to be relatively stable. This is a change from prior expectation of growth in low-single digit. The new guidance reflects a low-rate environment and slightly lower-than-expected loan balances.

NIM will continue to reflect the impact of excess liquidity on balance sheet.

The company now expects non-interest income to be up by high-single/low-double digit, reflecting growth in most of the core fee-based businesses. The bank had earlier projected the same to rise in mid-single digits.

Management anticipates mortgage originations to exceed last year’s level of $8.3 billion.

Given the stronger revenue outlook, expenses are now likely to be up by low-single digit, with the main driver being higher production-related incentives. This is a change from previous guidance of being relatively stable.

Net charge-offs (NCOs) to average loans are expected to be in the 20-30 bps range, down from earlier outlook of being in 35-45 bps range.

GAAP tax rate is anticipated to be approximately 20%.

Long-Term Targets

The company expects to achieve cash efficiency ratio of 54-56%.

NCO rate is expected to be 40-60 bps.

Return on tangible common equity (ROTCE) is expected to be 16-19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, KeyCorp has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, KeyCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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