STT State Street Corporation

KeyCorp (KEY) is scheduled to report its second quarter 2011 results before the opening bell on Tuesday, July 19. The Zacks Consensus Estimates for the quarter is 20 cents per share, representing a year-over-year growth of nearly 235%.

We expect KeyCorp’s business restructuring actions to continue fueling its credit quality, capital position and liquidity, although the company’s results are likely to be affected by the volatile operating environment and added costs of complying with the Basel III norms. Moreover, KeyCorp’s recent decision to raise quarterly dividend will boost shareholder value.

Previous Quarter Performance

KeyCorp’s first quarter 2011 earnings of 27 cents per share were substantially ahead of the Zacks Consensus Estimate of 15 cents. Better-than-expected results primarily benefited from a growth in non-interest income, lower non-interest expenses and an improvement in provision from credit losses. However, lower net interest income and average earning assets were among the negatives.

Additionally, KeyCorp repaid its outstanding $2.5 billion TARP funds during the quarter, thus removing the extra financial burden of preferred dividends that it used to pay to the U.S. Treasury.

Net income from continuing operations for the reported quarter excludes accelerated amortization of the discount on the repurchased preferred shares from the U.S. Treasury of $49 million. Considering this one-time charge, KeyCorp reported net income from continuing operations of $184 million or 21 cents per share compared with a net loss from continuing operations of $98 million or 11 cents per share in the prior-year quarter.

Earnings Estimate Revisions – Overview

Prior to the results release, KeyCorp’s earnings estimate has remained stable over the last 7 days.

We will now look into the details of the earnings estimate revisions to substantiate why investors should be interested in this stock.

Agreement of Analysts

Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the bullish second quarter earnings outlook for KeyCorp. Of the 24 analysts covering the stock, 3 have inched up their estimates for the second quarter over the last 7 days.

Moreover, for fiscal 2011, 1 out of the total 23 analysts has increased estimate over the last 7 days. For 2012, 2 analysts out of 25 analysts have increased their estimates over the last 7 days. This indicates a modest upward pressure on the performance of the stock in the near term.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the second quarter has remained unchanged at 20 cents over the last 7 days. Similarly, for 2012, estimate has remained stable at 76 cents per share. However, estimate for 2011 has moved down from earnings per share of 78 cents to 77 cents.

The magnitude of estimate revisions explains why holding on to the stock at the current level will be a good decision.

Earnings Surprise

KeyCorp’s performance has been stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 220.43%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

By and Large

In May 2011, KeyCorp announced an increase in its quarterly dividend from 1 cent per share to 3 cents. The company had last hiked its quarterly dividend in December 2007 to 37.5 cents from 36.5 cents. However, owing to the financial crisis, the company had to continuously lower its dividend. It was in April 2009, that the company finally lowered it to 1 cent per share. The latest dividend increase would definitely boost investors’ confidence in the stock.

Furthermore, KeyCorp continues to gain market share through its restructuring efforts. Over the last two years, the company opened 77 new branches and renovated approximately 145 other branches, thus expanding KeyCorp’s branch network to 1,040 branches. The company expects to open 27–32 new branches before 2011 end as part of its long-term plan to modernize and strengthen its presence in selected markets.

However, the pressure on net interest margin is a concern for KeyCorp at this point. Though the company has started benefiting from improved funding costs and better earning asset yields since the second half of 2009, we expect margin pressure to remain in place in the near term due to a soft new loan demand, resulting from the sluggish economic recovery.

Conclusion

The estimate revision trends and the magnitude of revision reflect a significant likelihood of upward pressure on the shares over the near term.

KeyCorp currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.

Along with KeyCorp, Bank of America Corporation (BAC), State Street Corp. (STT) and Bank of New York Mellon Corporation (BK) are also slated to report second quarter earnings on July 19.

 
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