KeyCorp Earnings: Reduced Net Interest Income Pressure Should Materialize In the Second Half of 2024
We think the market is punishing KeyCorp without fully considering 2024 guidance; stock remains undervalued.
Key Morningstar Metrics for KeyCorp
- Fair Value Estimate: $20.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: High
What We Thought of KeyCorp’s Earnings
KeyCorp’s KEY adjusted fourth-quarter earnings were not too far off the FactSet consensus of $0.23 per share and our estimate of $0.19 per share. Reported earnings were adjusted to $0.25 per share primarily due to the impact of some notable items: an FDIC special assessment charge of $190 million for uninsured deposits of certain failed institutions during the banking turmoil of March 2023, efficiency-related expenses of $67 million, and a pension settlement charge of $18 million.
Fourth-quarter revenue was in line with consensus and our estimates. We do not plan to materially change our $20 fair value estimate for KeyCorp, and we believe the market is punishing it for its fourth-quarter results without fully considering 2024 guidance.
The quarter’s net interest income, or NII, was reported at $928 million, slightly up from $923 million in the previous quarter and significantly down from $1.23 billion in the prior-year quarter. Revenue also declined from the third quarter due to pressure in investment banking and debt placement fees, along with lower customer derivative trading revenue. Core expense growth for 2023 remained relatively stable year over year at 1.1% and was slightly lower than in the prior-year quarter.
KeyCorp took several actions to optimize its balance sheet in 2023 that negatively affected profitability. The company reduced its risk-weighted assets by $14 billion, exited some nonrelationship businesses, and reduced its reliance on brokered deposits and wholesale funding. We should start to see results from this repositioning pay off this year. According to management’s guidance, the core expense base should remain relatively stable, and they expect annual fee income growth of around 5%, with additional possible upside if capital markets rebound. NII is expected to grow in the back half of the year after a moderate decline in the first half.
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