KeyCorp Earnings: Deposit Base Increases Slightly Even as Funding Costs Rise

KeyCorp Stock at a Glance

• Current Morningstar Fair Value Estimate: $21.00
• Stock Star Rating: 5 Stars
• Uncertainty Rating: High
• Economic Moat Rating: None

KeyCorp Earnings Update

No-moat-rated KeyCorp KEY reported first-quarter results that show earnings pressure is building, but we view the pressure as manageable. We had already expected fourth-quarter results would be the peak for profitability in the current rate cycle, and while the drop-off from that peak has accelerated a bit, it is nothing categorically different.

We think the market did a reasonable job of sorting KeyCorp on a relative basis into the higher-risk names, as the bank is indeed facing more earnings pressure than most peers we cover. However, on an absolute basis, we have a hard time getting to today’s market price, even after reviewing the damage of a post-March banking environment.

As we update our projections once again and make sure we are being prudent with our through-the-cycle net interest margin estimate (assuming rates eventually fall from current levels), we do not expect a material change to our $21 fair value estimate. We believe the shares remain materially undervalued.

KeyCorp saw its deposit base increase slightly in the first quarter, which is good news compared with market worries about deposit outflows over the last month.

The bank was able to maintain its full-year deposit growth outlook, although funding costs are accelerating, which caused the net interest income outlook to fall to “down 1%-3%” from “up 1%-4%.” While this is not good, it is a better result than we were expecting in our updated March 28 forecast, where we were looking for a decline of 9%. We were also already projecting non-interest-bearing deposits to decline to a mid-20s percentage of total deposits and an accelerating deposit beta. We wouldn’t read too much into a relatively small reserve build in the quarter and the one-time expense charge of $64 million. Excluding the expense charge, the stable expense outlook remains intact.