Cleveland, Ohio – KeyCorp presented a mixed bag of results in its first fiscal quarter, showcasing a significant drop in net interest income alongside solid credit quality. The recent inflation report indicating a 3.5% increase in consumer prices for the month of March has set a favorable short-term backdrop for banks. However, looming cuts to the federal fund rate in FY 2024 are expected to further impact the bank’s net interest income. With KeyCorp currently trading at a premium valuation, the potential for upside appears limited. Nonetheless, the 6% yield seems sustainable from a payout perspective.
KeyCorp’s first-quarter earnings fell short of estimates, with adjusted earnings coming in at $0.20 per share, missing the consensus estimate by $0.03 per share. Revenues managed to surpass expectations by approximately $19 million.
The bank’s earnings results for the quarter were affected by a decline in net interest income as projected. Generating $1.53 billion in revenues for the quarter, KeyCorp experienced an 11% year-over-year decrease, primarily driven by challenges in loan balances and increased deposit costs. Notably, credit loss provisions saw a year-over-year decline, indicating overall sound balance sheet quality.
As anticipated, KeyCorp witnessed a decline in net interest income for the first quarter, continuing a downward trend over the past year. With total net interest income of $886 million for Q1’24, a 4.5% quarter-over-quarter drop was observed due to lower average loan balances and higher funding costs. Year over year, the net interest income plummeted by 20% owing to a consistent reduction in loan balances.
Despite an increasing net charge-off and non-performing loan ratios, KeyCorp’s credit quality remains steadfast. With a net charge-off ratio of 0.29% in Q1’24 and stable credit provisions, the bank demonstrates solid loan quality. A potential downside risk lies in deteriorating asset quality in the event of slowing economic growth, impacting KeyCorp’s credit provisions and earnings.
KeyCorp offers shareholders a quarterly dividend of $0.2050 per share, translating to a 6% yield. With only a third of its earnings allocated to dividends, the bank has room for dividend growth even in a low-rate environment.
Valued at a 15% premium to book value, KeyCorp faces potential challenges ahead with expected rate cuts in FY 2024 likely to further strain its declining net interest income. Forecasting a fair share value of $15.60 based on historical price-to-book ratios, limited upside potential around 8% is anticipated.
The primary risk for KeyCorp lies in the continual contraction of net interest income, exacerbated by the expected federal fund rate cuts in the latter half of the year. This could result in heightened earnings pressure and diminished capital returns for the bank.
In conclusion, KeyCorp’s first-quarter earnings highlighted stable credit provisions but significant headwinds in net interest income. Despite limited upside in FY 2024 due to evolving interest rates, the bank’s 6% yield remains robust, offering stability to income-oriented investors while lacking substantial valuation upside.
