EUR 850.00 For Business Accounts Only

Morningstar | Slower Results in 3Q for KeyCorp, but Longer-Term Story Still Intact

No-moat KeyCorp turned in a decent third-quarter performance that fit well within our expectations for the firm. We are maintaining our fair value estimate of $21 per share, which is 2 times tangible book value as of September. The adjusted return on tangible common equity remained steady, coming in at 16.8% from 16.7% in the previous quarter. Adjusted earnings per share improved slightly, to $0.45, from $0.44 last quarter. Core net interest income and noninterest income were up 6% and 3% year over year, respectively. This occurred even as adjusted expenses were relatively stable year over year.

We would highlight that management made no changes to their long-term targets. Some items during the quarter were certainly on the weaker side of the spectrum, including corporate service fees, card and payment fees, and no bank has been immune to the recent decline in mortgage servicing fees, but we see no reason to believe KeyCorp’s core fees will decline over the longer term. Quarter-to-quarter volatility is expected. Further, investors may have been disappointed to learn that KeyCorp may have to push back the timing of certain efficiency goals, but we would highlight this was almost entirely due to a delay in the removal of the FDIC surcharge. Eventually this surcharge will fall off, whether or not it happens next quarter, or three quarters from now, is not material to the long-term operations of the bank. We project that the bank will continue to improve its efficiency, growing expenses at less than a 1% CAGR over the medium term, with expenses finishing flat to down for the current year. This should occur even as revenue continues to grow in the midsingle digits over the longer term. This should allow the bank’s efficiency ratio to improve over the longer term.

While loan growth wasn’t spectacular quarter over quarter, average balances were still up from the previous year. Given the positive momentum in the economy and growing GDP, we would eventually expect this to translate to higher loan growth for the banks. We also appreciate that management is being cautious with certain portfolios, such as commercial real estate, as competitive pressures have heated up. Reported net interest margins continue to be affected by purchase accounting accretion, although both GAAP and core NIMs have generally moved in a positive direction for the year. We still see some room for NIM expansion for KeyCorp over the next couple years. Overall, expense control continues to be within longer-term expectations, and credit quality remains pristine, which we expect to continue for the rest of the year given the strong employment market.