KeyCorp (KEY) Beats On Q4 Earnings As Revenues Increase
KeyCorp.’s KEY fourth-quarter 2016 adjusted earnings of 31 cents per share outpaced the Zacks Consensus Estimate of 29 cents. The figure was up 14.8% from the prior-year quarter.
KeyCorp’s shares rose nearly 1% in pre-market trading, reflecting impressive organic growth and easing margin pressure. Notably, the price reaction during the full trading session will provide a better idea about how investors have accepted the results.
Better-than-expected quarterly results indicate revenue synergies from the First Niagara Financial Group acquisition deal (completed in Aug 2016). Further, the company reported impressive growth in loans and deposits. However, higher operating expenses and a rise in provision for credit losses were the downsides.
Including non-recurring merger-related charges of $198 million, Keycorp’s net income from continuing operations came in at $213 million, down 4.9% from the prior-year quarter.
For 2016, earnings of 80 cents per share lagged the Zacks Consensus Estimate of $1.11. Also, it was down 23.8% year over year. Net income from continuing operations was $753 million, down 15.6% from 2015.
Revenues Surge on First Niagara Deal, Expenses Increase
Total revenue for the quarter surged 43% year over year to $1.57 billion. Also, this compared favorably with the Zacks Consensus Estimate of $1.45 billion.
For 2016, revenues increased 18% year over year to $5.0 billion. Also, this was above the Zacks Consensus Estimate of $4.9 billion.
Tax-equivalent net interest income jumped 55.4% year over year to $948 million. The rise was attributable to benefits from the First Niagara acquisition and ongoing business activities. Also, taxable-equivalent net interest margin from continuing operations grew 25 basis points (bps) year over year to 3.12%.
Non-interest income (excluding merger related charges) was $609 million, an increase of 25.6% from the year-ago quarter. A rise in all fee income components drove the surge.
Non-interest expense (excluding merger related charges) jumped 38.8% year over year to $1.01 billion due to a rise in both personnel as well as non-personnel expenses. Also, the quarter recorded higher merger-related charges.
Healthy Balance Sheet
As of Dec. 31, 2016, average total deposits were $104.7 billion, up 10.3% from the prior quarter. Further, average total loans were $85.4 billion, up 9.9% from Jun. 30, 2016.
Deterioration in Credit Quality
Net loan charge-offs, as a percentage of average loans, increased 9 bps year over year to 0.34%. Provision for credit losses increased 46.7% year over year to $66 million.
Also, KeyCorp’s allowance for loan and lease losses was $858 million, up 7.8% year over year. Further, non-performing assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 0.79%, up 12 bps year over year.
Capital Ratios Deteriorate
KeyCorp's tangible common equity to tangible assets ratio was 8.09% as of Dec 31, 2016, down from 9.98% as of Dec 31, 2015. In addition, Tier 1 risk-based capital ratio was 10.95% versus 11.35% as of Dec 31, 2015.
The company’s estimated Basel III Tier 1 common ratio was 9.56% at the end of the quarter, down from 10.94% as of Dec 31, 2015.
Share Repurchases
During the reported quarter, KeyCorp repurchased $68 million worth of shares as part of its 2016 capital plan.
Our Take
Restructuring initiatives being undertaken by KeyCorp will be supported by a robust balance-sheet position. In addition, the company’s financials will continue to benefit from the synergies from the First Niagara transaction. Further, with gradual rise in interest rates, margin pressure is expected to ease in the coming quarters. However, increased dependence on home equity and commercial real estate loans raises the exposure of the company’s profits to these avenues.
KeyCorp Price, Consensus and EPS Surprise
KeyCorp Price, Consensus and EPS Surprise | KeyCorp Quote
Keycorp currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Major Regional Banks
U.S. Bancorp’s USB fourth-quarter 2016 earnings per share of 82 cents came in a penny above the Zacks Consensus Estimate. Better-than-expected results were driven by growth in net interest income and non-interest income. However, a rise in expenses and higher credit costs were on the downside.
Comerica Inc.’s CMA fourth-quarter 2016 adjusted earnings per share of 99 cents came ahead of the Zacks Consensus Estimate of 95 cents. Better-than-expected results reflect higher revenues and lower expenses. Moreover, fall in provisions was another tailwind. However, lower deposits and rise in non-performing assets remain concerns.
Among other Wall Street giants, SunTrust Banks, Inc. STI is scheduled to report fourth-quarter 2016 earnings on Jan 20.
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