KeyCorp's Q3 Earnings Beat, Stock Dips on Weak Asset Quality

KeyCorp’s KEY third-quarter 2024 adjusted earnings from continuing operations of 30 cents per share beat the Zacks Consensus Estimate of 27 cents. Further, the bottom line reflected a 3.4% rise from the prior-year quarter. The reported quarter included the FDIC special assessment charge of $6 million, but its impact on earnings was negligible.

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The stock lost 1.1% in pre-market trading on deteriorating credit quality and spread income weakness concerns.

Results benefited from a rise in adjusted non-interest income, higher net interest income (NII), and lower expenses. Improving deposit balance was another positive. However, lower provisions and a lower loan balance were undermining factors. Further, higher deposit costs weighed on net interest margin (NIM).

Results in the reported quarter excluded $737 million after-tax loss on the sale of securities as part of a strategic repositioning of the portfolio. After considering these, net loss from continuing operations attributable to common shareholders was $447 million against a profit of $266 million in the prior year quarter. Our estimate for the metric was a loss of $442.9 million.

KEY’s Revenues Up, Expenses Decline

Total quarterly revenues were $695 million. Adjusted quarterly total revenues (tax equivalent or TE) rose 3% year over year to $1.61 billion. Moreover, the top line beat the Zacks Consensus Estimate of $1.59 billion.
 
NII (on a TE basis) increased 4.4% to $964 million. NIM (TE basis) from continuing operations increased 16 basis points (bps) to 2.17%. Both metrics benefited from the re-investment of proceeds from maturing investment securities into higher-yielding ones and a shift in funding mix, partially offset by lower loan balances because of balance sheet optimization efforts during 2023 and higher deposit costs. Our estimate for NII (FTE) and NIM was $940.9 million and 2.16%, respectively.

Non-interest income was negative $269 million.  Excluding securities losses, adjusted non-interest income grew roughly 1% to $649 million. The rise was largely attributable to higher trust and investment services income, commercial mortgage servicing fees, and investment banking and debt placement fees. Our estimate for the metric was $654 million.

Non-interest expenses declined 1.5% to $1.09 billion. This included an additional FDIC special assessment charge of $6 million but excluded a $7 million intangible asset amortization charge. We projected the metric to be $1.11 billion.

Keycorp’s Loans & Deposits

At third-quarter end, average total deposits were $147.8 billion, up 2.5% from the prior quarter end. The rise was driven by growth in both consumer and commercial deposits. Our estimate for the metric was $113.6 billion.

Average total loans were $106.2 billion, down 2.5% sequentially. The decline was due to the company’s planned balance sheet optimization efforts. We had anticipated average total loans of $110.1 billion.

Credit Quality Deteriorates For KEY

Net loan charge-offs, as a percentage of average loans, rose 34 bps year over year to 0.58%. The allowance for loan and lease losses was $1.49 billion, up marginally.

Non-performing assets, as a percentage of period-end portfolio loans, other real estate-owned property assets and other non-performing assets, were 0.70%, up 29 bps year over year.

Also, the provision for credit losses was $95 million, increasing 17.3%. The rise reflected changes in economic outlook and credit portfolio migration partially offset by the impacts of KeyCorp’s balance sheet optimization efforts. We had expected the metric to be $101.1 million.

Keycorp’s Capital Ratios Improve

KeyCorp's tangible common equity to tangible assets ratio was 6.2% as of Sept. 30, 2024, up from 4.4% in the corresponding period of 2023. The Tier 1 risk-based capital ratio was 12.6%, up from 11.4%. The Common Equity Tier 1 ratio was 10.8%, up from 9.8% as of Sept. 30, 2023.

Scotiabank Announces Equity Stake in KeyCorp

During the quarter, The Bank of Nova Scotia BNS also known as Scotiabank, announced an investment of $2.8 billion in KeyCorp. For BNS, the step marks a massive advancement as it tries to expand operations in North America.

The deal involves the Bank of Nova Scotia buying nearly 163 million KEY shares in two parts. KeyCorp received the first tranche of strategic minority investment from Scotiabank. With an investment of 0.8 billion, Scotiabank now holds approximately 4.9% stake in KeyCorp.

The second part of the deal involves Scotiabank making an additional $2 billion investment. It is expected to close in the first quarter of 2025, pending the Federal Reserve’s consent and satisfaction of customary closing conditions.

The total $2.8 billion investment is expected to lift KeyCorp’s common equity tier 1 capital ratio by 195 bps to 12.4% and tangible book value per share by 10% as of June 30, 2024.

Our Take on KeyCorp

Decent loan balances, balance sheet repositioning efforts, strategic buyouts 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 and a significant commercial loan exposure remain concerns.

KeyCorp currently carries a Zacks Rank #4 (Sell).

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 third-quarter 2024 adjusted earnings per share of $3.49 surpassed the Zacks Consensus Estimate of $3.29. In the year-ago quarter, the company had reported earnings per share of $3.60.

PNC’s results were aided by a rise in fee income and higher loan balance. However, a decline in NII, an increase in provisions for credit losses and a rise in expense base were major headwinds.
 
U.S. Bancorp’s USB third-quarter 2024 adjusted earnings per share (excluding the impacts of notable items) of $1.03 beat the Zacks Consensus Estimate by 3%. However, the bottom line decreased 1.9% from the prior-year quarter.

Results benefited from lower expenses. Also, a strong capital position was a tailwind. However, a decline in NII and non-interest income created major headwinds for USB.

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The PNC Financial Services Group, Inc (PNC): Free Stock Analysis Report
 
U.S. Bancorp (USB): Free Stock Analysis Report
 
KeyCorp (KEY): Free Stock Analysis Report
 
Bank of Nova Scotia (The) (BNS): Free Stock Analysis Report

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