Fee Income & NII to Aid KeyCorp's Q4 Earnings, High Provisions to Hurt

KeyCorp KEY is scheduled to announce fourth-quarter and full-year 2024 results on Jan. 21, before the opening bell. During the quarter, lending activities witnessed a solid improvement.Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.Per the Federal Reserve’s latest data, the demand for commercial and industrial (C&I) loans (accounting for roughly 50% of KeyCorp’s average loan balances) improved during the fourth quarter. Further, demand for consumer loans (constituting roughly 31% of average loan balances) improved significantly.For the to-be-reported quarter, we expect KeyCorp’s average loan balance to be $149.3 billion, up 2.9% year over year.The Zacks Consensus Estimate for KEY’s average earning assets is pegged at $173.2 billion, indicating a marginal rise from the prior-year quarter. Our estimate for the metric stands at $173.5 billion.Further, the Fed has reduced interest rates by 100 basis points (bps) since September 2024. This is likely to have aided KEY’s net interest income (NII) and net interest margin (NIM) through deposit repricing and stabilizing funding costs. Moreover, the yield curve steepened and then normalized during the fourth quarter, further supporting NIM and NII growth to some extent.The consensus estimate for NII (on a fully tax-equivalent or FTE basis) is pegged at $1.04 billion, suggesting a year-over-year rise of 12%. We project the metric to be the same as the estimate.The company expects NII to grow 10% or more on a year-over-year basis in the fourth quarter of 2024 while NIM is estimated to be nearly 2.4%.Factors to Influence KEY’s Q4 PerformanceNon-Interest Income: Despite interest rate cuts, mortgage rates remained elevated during the fourth quarter. The rate on a 30-year fixed mortgage increased 79 bps to 6.91% in December 2024 from 6.12% at the start of October. As such, mortgage originations and refinancing activities remained decent despite home price appreciation. Hence, income from KEY’s mortgage banking business is expected to have recorded some improvement.The Zacks Consensus Estimate for commercial mortgage servicing fees of $62.3 million suggests a 29.7% year-over-year jump, while consumer mortgage income of $13.2 million indicates 20.2% growth. Our estimates for commercial mortgage servicing fees and consumer mortgage income are $53.5 million and $13.9 million, respectively.The consensus estimate for trust and investment services income of $143.3 million suggests an increase of 8.5% from the prior-year quarter. We project the metric to be $149.3 million.Increased client activity and high volatility, driven by the optimism following Donald Trump’s victory in the presidential elections, are expected to have favorably impacted KeyCorp’s trading business in the quarter. Also, deal-making activities were robust. The IPO market saw signs of cautious optimism, given market volatility, geopolitical challenges and global monetary easing, while bond issuance volumes were decent on favorable economic conditions and corporate spreads at near historical lows despite seasonally slow volumes in December. The consensus estimate for KeyCorp’s IB and debt placement fees of $194.5 million indicates a 43% jump. We expect the metric to be $173.9 million.The Zacks Consensus Estimate of $68.7 million for service charges on deposit accounts implies a 5.7% rise. Our estimate for service charges on deposit accounts is $72.3 million.With an improvement in consumer spending during the to-be-reported quarter, the Zacks Consensus Estimate for cards and payments income of $87.7 million suggests a rise of 4.4%. Our estimate for the same stands at $82.6 million.Hence, the consensus estimate for KeyCorp’s total non-interest income of $702.2 million indicates a year-over-year increase of 15.1%. Our estimate for the metric stands at $688 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 rise in total non-interest expenses.Our estimate for total non-interest expenses stands at $1.18 billion, indicating a decline of 14.3% 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) amid a higher for longer interest rate backdrop and inflationary pressure. We estimate provision for credit losses to be $102.2 million, suggesting a marginal rise year over year.The Zacks Consensus Estimate for non-performing assets is pegged at $733.8 million, indicating a 24.2% surge. Further, the consensus estimate for non-performing loans is $664 million, implying an increase of 15.7%.  We project non-performing assets and non-performing loans to be $726.5 million and $614.9 million, respectively.Scotiabank Buys Equity Stake in KeyCorpDuring the quarter, The Bank of Nova Scotia (BNS), also known as Scotiabank, completed its strategic minority investment of roughly $2 billion in KeyCorp. With this investment, Scotiabank’s stake increased to 14.9% in KEY. This marks a massive advancement for KEY as it tries to expand operations in North America.The deal involved the Bank of Nova Scotia buying nearly 163 million KEY shares in two parts. KeyCorp received the first tranche of strategic minority investment of 0.8 billion and $2 billion in the second part of the deal.KeyCorp’s 2024 OutlookManagement expects the average loan balance to be down 7-8%.Period-end loans are expected to be down 5-6%. Criticized loans are expected to have peaked and a decline is expected going forward from current levels.Average deposits are expected to be up 1-2%, with client deposits up 3-4% in 2024.NII (TE) is expected to be down 2-5% in 2024. This equates to the 2024 annualized NII (TE) being up in low single digits.Non-interest income (excluding the loss of $918M on the loss on the sale of securities incurred in the third quarter) is expected to be up 6% or more in the year. Investment banking revenues are anticipated to be on the higher end of the $600-$650 million range.Non-interest expenses (excluding FDIC special assessment, efficiency-related expenses and pension settlement charges) are anticipated to be up 2% in 2024 from $4.4 billion in 2023.Net charge-offs to average loans are expected to be toward the higher end of the 30-40 bps range. Provisions are expected to be approximately $400 million.The GAAP tax rate is expected to be 20%.What the Zacks Model Predicts for KeyCorpPer 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 -0.50%.Zacks Rank: The company currently carries a Zacks Rank #3.Q4 Earnings & Sales Growth Expectations for KEYThe Zacks Consensus Estimate for KEY’s fourth-quarter earnings is pegged at 33 cents, which has remained unchanged over the past week. The figure suggests a 32% jump from the prior-year quarter.KeyCorp Price and EPS Surprise KeyCorp price-eps-surprise | KeyCorp QuoteThe consensus estimate for sales of $1.73 billion indicates a rise of 13.2%.Bank Stocks Worth ConsideringHere 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:Hilltop Holdings Inc. HTH is scheduled to release fourth-quarter and full-year 2024 results on Jan. 30. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +33.73%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Quarterly earnings estimates for HTH have remained unchanged over the past week at 28 cents.The Earnings ESP for Zions Bancorporation ZION is +2.13% and it carries a Zacks Rank of 3 at present. The company is slated to report fourth-quarter and full-year 2024 results on Jan. 21.Over the past seven days, the Zacks Consensus Estimate for ZION’s quarterly earnings has remained unchanged at $1.26.Just Released: Zacks Top 10 Stocks for 2025Hurry – you can still get in early on our 10 top tickers for 2025. Handpicked by Zacks Director of Research Sheraz Mian, this portfolio has been stunningly and consistently successful. From inception in 2012 through November, 2024, the Zacks Top 10 Stocks gained +2,112.6%, more than QUADRUPLING the S&P 500’s +475.6%. Sheraz has combed through 4,400 companies covered by the Zacks Rank and handpicked the best 10 to buy and hold in 2025. You can still be among the first to see these just-released stocks with enormous potential. See New Top 10 Stocks >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report KeyCorp (KEY): Free Stock Analysis Report Zions Bancorporation, N.A. (ZION): Free Stock Analysis Report Hilltop Holdings Inc. (HTH): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks