KeyCorp’s KEY first-quarter 2023 adjusted earnings from continuing operations of 44 cents per share beat the Zacks Consensus Estimate of 41 cents. The bottom line declined 2.2% from the prior-year quarter. Our estimate for the metric was 43 cents per share.
Shares of KEY lost more than 4.5% in early-market trading on concerns including deposit outflows, rising funding costs and deteriorating credit quality weighed on investor sentiments.
A rise in net interest income (NII) driven by decent average loan growth and higher interest rates supported KEY’s results. However, a fall in non-interest income due to a tough operating backdrop, higher provisions and a rise in expenses were the undermining factors. Also, a decline in average deposits was a headwind.
Net income from continuing operations attributable to common shareholders was $275 million, down 34.5% year over year. We had projected the same to be $398 million.
Revenues & Expenses Rise
Total revenues grew 1.1% year over year to $1.71 billion. The top line lagged the Zacks Consensus Estimate of $1.79 billion. Our estimate for the metric was $1.8 billion.
NII (on a tax-equivalent basis) grew 8.4% to $1.11 billion. The increase was mainly driven by higher earning asset balances and a rise in rates, partly offset by higher funding costs. Our estimate for NII was $1.22 billion.
Taxable-equivalent net interest margin from continuing operations increased 1 basis point (bp) to 2.47%. Our estimate for NIM was 2.76%.
Non-interest income was $608 million, falling 10.1%. The decline was mainly due to lower consumer mortgage income, investment banking and debt placement fees and operating lease income and other leasing gains. Our estimate for non-interest income was $585.5 million.
Non-interest expenses increased 9.9% to $1.18 billion. We had projected the metric to be $1.08 billion.
At the first-quarter end, average total deposits were $143.4 billion, down 1.6% from the prior quarter. The decline reflected the normalization of pandemic-related balances, changing client behavior owing to higher interest rates and normal seasonal deposit outflows.
Average total loans were $119.8 billion, up 1.8%. The growth was primarily driven by robust strength in commercial loan portfolios.
Credit Quality Worsening
Net loan charge-offs, as a percentage of average loans, rose 2 bps year over year to 0.15%. Allowance for loan and lease losses was $1.38 billion, up 24.9%.
Provision for credit losses was $139 million, surging 67.5%. This mainly reflected the uncertain economic outlook and loan growth. We had projected the metric to be $194 million.
Non-performing assets, as a percentage of period-end portfolio loans, other real estate-owned properties assets and other non-performing assets were 0.37%, down 7 bps.
Capital Ratios Deteriorates
KeyCorp’s tangible common equity to tangible assets ratio was 4.6% as of Mar 31, 2023, down from 6% in the corresponding period of 2022. Tier 1 risk-based capital ratio was 10.6%, declining from 10.7%.
Common Equity Tier 1 ratio was 9.1%, down from 9.4% as of Mar 31, 2022.
Solid loans balances, along with higher interest rates, are likely to continue supporting KeyCorp’s revenues. However, elevated expenses and weakness in the mortgage business amid a tough macroeconomic backdrop are near-term concerns.
KeyCorp Price, Consensus and EPS Surprise
KeyCorp currently carries a Zacks Rank #5 (Strong Sell).
Performance of Other Major Banks
The PNC Financial Services Group, Inc.’s PNC first-quarter 2023 earnings per share of $3.98 surpassed the Zacks Consensus Estimate of $3.60 and improved 21% year over year. Per our estimate, the metric was $3.64 per share.
PNC’s results were aided by an increase in NII, supported by higher rates and loan growth. However, rising expenses and higher provisions were headwinds.
U.S. Bancorp’s USB first-quarter 2023 earnings per share (excluding merger and integration-related charges) of $1.16 handily beat the Zacks Consensus Estimate of $1.13 per share. It grew 17.2% from the prior-year quarter.
Results have benefited from an increase in NII, supported by higher interest rates. However, a decline in non-interest income (largely on lower mortgage banking income) and higher expenses were the headwinds. Also, USB’s credit quality deteriorated in the reported quarter.
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