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NII and Moderate Fee Revenue Will Hurt KeyCorp (KEY) Q1 Earnings – April 19, 2022

Key Corp (KEY Free Report) is expected to release first quarter 2022 results on April 21, before the opening bell. The overall lending scenario has been impressive in the quarter ahead.

According to the latest data from the Federal Reserve, consumer loans, which make up about 30% of KeyCorp’s average loan balances, rose in the quarter. In addition, commercial and industrial loan balances (representing nearly 50% of KEY’s average loan balances) improved.

The Zacks consensus estimate for average earning assets is pegged at $169.7 billion, suggesting a marginal increase on a sequential basis.

Although the Federal Reserve raised interest rates by 25 basis points (bps) in mid-March, this is likely to have a much lesser impact on net interest margin (NIM) and net income. (NII) from KeyCorp during the quarter. Still, robust loan growth is expected to have offered some support.

The consensus estimate for NII (on a fully tax-equivalent basis) is $1.01 billion, reflecting a 2.4% decline from the figure reported in the prior quarter.

Other factors at play

Non-interest income: Unlike recent quarters, deal-making came to a screeching halt in March as the ongoing conflict between Russia and Ukraine and raging inflation figures weighed on global business sentiment. Similarly, subsequent IPOs and equity offerings dried up as equity market performance turned disappointing. On the other hand, bond issues were probably correct. As such, the performance of KeyCorp’s investment banking (IB) business is expected to have been subdued in the quarter to report.

Still, increased volatility and client activity in the capital markets appear to have had a positive impact on trading activity during the quarter. The consensus estimate for KeyCorp IB and Capital Markets revenue of $206 million indicates a 36.2% sequential drop.

Also, unlike recent quarters, the deposit balance should not have increased much in the first quarter. This likely hurt KEY’s service fee revenue on deposit accounts. Zacks’ consensus estimate of $87 million for the same implies a 3.3% decline on a sequential basis.

Similarly, rising mortgage rates and inflation weighed on mortgage originations and refinancing activity during the quarter, hurting KeyCorp’s mortgage banking business. Thus, the Zacks consensus estimate for consumer mortgage revenue and mortgage servicing fees is pegged at $21.33 million and $45 million, suggesting a sequential decrease of 14.7% and 6.3%, respectively.

In addition, rising inflation and uncertainty surrounding economic growth, primarily due to ongoing geopolitical concerns, likely hurt consumer confidence. Thus, it could have had a negative impact on KEY’s card business. Zacks’ consensus estimate for cards and payments revenue of $81 million suggests a decline of 5.8% from the prior quarter.

Zacks’ consensus estimate for trust and investment services revenue of $132 million suggests a decline of 2.2% from the prior quarter.

The consensus estimate for KeyCorp’s total non-interest revenue of $738 million indicates an 18.8% decrease on a sequential basis.

Expenses: KeyCorp’s efforts to reorganize operations and exit unprofitable/non-core businesses have helped it reduce costs in the past. Nonetheless, as the company continues to invest in the franchise, technology upgrades and inorganic growth strategy, spending is expected to have trended higher in the first quarter.

Asset quality: With loan balances rising and expectations of an economic slowdown due to geopolitical and inflationary concerns, KeyCorp is expected to have built up reserves in the first quarter.

What the Zacks model predicts

Our proven model does not predict an earnings beat for KeyCorp this time around. This is because he doesn’t have the right combination of the two key ingredients – a positive win ESP and Zacks rank #3 (Hold) or better – to increase the chances of a win beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: The earnings ESP for KeyCorp is -2.08%.

Zack’s Ranking: The company currently carries a No. 3 Zacks rank.

Zacks’ consensus estimate for the company’s first-quarter earnings is pegged at 48 cents per share, which has been revised down 2% in the past seven days. The figure suggests a 21.3% drop from the number reported in the year-ago quarter.

The consensus sales estimate of $1.76 billion indicates a 0.7% year-over-year increase.

Bank stocks to consider

Here are a few bank stocks you might want to consider, as our model shows they have the right mix of elements to outperform this time around:

The ESP on earnings for Associated Bank-Corp (BSA Free Report) is +0.81% and it carries a Zacks Rank #2 (Buy), at present. The company is expected to release its first quarter 2022 results on April 21.

Over the past seven days, ASB’s Zacks consensus estimate for quarterly earnings has fallen 2.6%.

M&T Banking Corporation (MTB Free Report) is expected to release its first quarter 2022 results on April 20. The company, which currently holds a No. 3 Zacks ranking, has an ESP profit of +5.43%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MTB’s quarterly earnings estimates fell slightly over the past week.

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