KeyCorp KEY is scheduled to announce third-quarter 2024 results on Oct. 17, before the opening bell. During the quarter, lending activities witnessed modest improvement.

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Per the Federal Reserve’s latest data, the demand for commercial and industrial loans (accounting for roughly 50% of KeyCorp’s average loan balances) improved during the third quarter. On the other hand, demand for consumer loans (constituting roughly 31% of average loan balances) was steady.
 
For the to-be-reported quarter, we expect KeyCorp’s average loan balance to be $110.2 billion, down 6.3% year over year.

In early September, KeyCorp sold its low-yielding available-for-sale (AFS) investment securities portfolio worth almost $7 billion.

The Zacks Consensus Estimate for KEY’s average earning assets is pegged at $171.4 billion, indicating a marginal decline from the prior-year quarter. Our estimate for the metric stands at $173.9 billion.

Further, the Fed announced a 50 basis points (bps) interest rate cut on Sept. 19 for the first time since March 2020. This is likely to have supported KEY’s net interest income (NII) and net interest margin to some extent. However, both metrics are likely to have been adversely impacted by elevated deposit and funding costs and an inverted yield curve for the major part of the quarter.

The consensus estimate for NII (on a fully tax-equivalent or FTE basis) is pegged at $941.9 million, suggesting a year-over-year rise of 2%. We project NII (FTE) to be $940.9 million.

Factors to Influence KEY’s Q3 Performance

Non-Interest Income: Mortgage rates recorded an 87 bps fall, with the rate on a 30-year fixed mortgage declining to 6.08% in September from 6.95% at the start of July. This is likely to have positively impacted mortgage originations and refinancing activities despite home price appreciation. Hence, income from KEY’s mortgage banking business is expected to have improved.

The Zacks Consensus Estimate for commercial mortgage servicing fees of $58.5 million suggests a 27.2% year-over-year jump, while consumer mortgage income of $16.1 million indicates 7.3% growth. Our estimates for commercial mortgage servicing fees and consumer mortgage income are $54.6 million and $14.5 million, respectively.

The consensus estimate for trust and investment services income of $140.4 million suggests an increase of 8% from the prior-year quarter. We project the metric to be $142.3 million.

Increased client activity and high volatility are expected to have favorably impacted KeyCorp’s trading business in the quarter. Also, deal-making activities were decent. IPOs and bond issuance volumes were decent as global equity and bond markets witnessed robust performance. The consensus estimate for KeyCorp’s IB and debt placement fees of $156.1 million indicates a 10.7% rise. We expect the metric to be $151.4 million.

The Zacks Consensus Estimate of $66.7 million for service charges on deposit accounts implies a 3.4% fall. Our estimate for service charges on deposit accounts is $68.1 million.

With a slight weakness in consumer spending during the to-be-reported quarter, the Zacks Consensus Estimate for cards and payments income of $87.5 million suggests a decline of 2.8%. Our estimate for the same stands at $87 million.

Hence, the consensus estimate for KeyCorp’s total non-interest income of $656.2 million indicates a year-over-year increase of 2.1%. Our estimate for the metric stands at $645 million.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped it save costs in the past. Also, the company’s initiatives to drive operational efficiency are likely to have curbed expense growth in the to-be-reported quarter. Yet, investments in franchises and technological upgrades are expected to have led to a slight rise in total non-interest expenses.

Our estimate for total non-interest expenses stands at $1.12 billion, up marginally year over year.

Asset Quality: During the to-be-reported quarter, KEY is likely to have built reserves to safeguard its financials against delinquent loans (mainly C&I loans) on the expected economic slowdown and inflationary pressure. We estimate provision for credit losses to be $101.1 million, suggesting a 24.8% year-over-year rise.

The Zacks Consensus Estimate for non-performing assets is pegged at $665.6 million, indicating a 41.3% surge. Further, the consensus estimate for non-performing loans is $658.2 million, implying a jump of 44.7%.

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 has 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.

What the Zacks Model Predicts for KeyCorp

Per our proven model, the chances of KeyCorp beating the Zacks Consensus Estimate are low this time. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

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 -1.47%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Q3 Earnings & Sales Growth Expectations for KEY

The Zacks Consensus Estimate for KEY’s third-quarter earnings is pegged at 27 cents, which has remained unchanged over the past week. The figure suggests a 6.9% fall from the prior-year quarter.

KeyCorp Price and EPS Surprise

KeyCorp price-eps-surprise | KeyCorp Quote

As a result of the sale of AFS investment securities, KeyCorp is expected to incur an after-tax loss of $700 million in the third quarter.

The consensus estimate for sales of $1.59 billion indicates a rise of 1.7%.

Bank Stocks Worth Considering

Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time:

First Community Corporation FCCO is scheduled to release third-quarter 2024 results on Oct. 16. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +1.12%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FCCO’s quarterly earnings estimates have remained unchanged over the past week at 45 cents.

The Earnings ESP for First Horizon Corporation FHN is +3.18% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2024 results on Oct. 16.

Over the past seven days, the Zacks Consensus Estimate for FHN’s quarterly earnings has remained unchanged at 38 cents.

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KeyCorp (KEY) : Free Stock Analysis Report

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Bank of Nova Scotia (The) (BNS) : Free Stock Analysis Report

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