KeyCorp second quarter results, with double-digit loan and deposit growth in the first quarter, exceeded analysts’ expectations, and the company feels fairly positive about its outlook for the rest of the year despite economic uncertainty.
Industry-wide in the second quarter, banks set aside billion additional loan loss reserves in anticipation of bad loans.
AT Key bank, the credit quality in the loan portfolio – which is 75% business enterprises and 25% consumers – has declined slightly but remains relatively good, reflecting that there has not yet been a significant peak loans that turn sour due to borrowers struggling to pay. But with the end of some government stimulus packages, that could change in the second half of the year.
Net write-offs as a percentage of total loans have so far increased by only seven basis points compared to the second quarter of 2019 (0.36% vs. 0.29%). However, Key increased the allowance for credit losses to $ 482 million in the second quarter, which is more than six times the reserves in the second quarter of 2019. The company’s allowance for losses on loans or leases on loans of end of period is 1.61% (or 1.73% if Paycheque Protection Program loans are excluded).
KeyCorp president and CEO Chris Gorman told investors on Wednesday, July 22 that those reserves likely don’t need to be increased any further for the remainder of the year.
Key reported earnings attributable to common shareholders of $ 159 million, or 16 cents per diluted common share, for the quarter. This figure is up from 12 cents in the previous quarter, but down from 40 cents in the second quarter of 2019. Overall, Gorman said he expected third quarter performance to be similar to those of the second trimester.
Here are some other takeaways from Key’s second quarter earnings report and related discussions:
• While anyone can guess how long a pandemic-induced economic downturn can last, KeyCorp CFO Don Kimble told investors the company assumes a 9% unemployment rate through the fourth quarter. this year, with high unemployment expected until 2021. Being conservative, he said the consensus at KeyCorp is that the economy does not return to end-2019 levels until the end of 2021.
• Key reported record revenues up 17% from the prior quarter, largely due to commissions from investment banking, payments and residential mortgages. Key expects mortgage activity to remain buoyant due to low interest rates.
• Average loans increased 12% from the previous quarter and 19% from the second quarter of 2019. Compared to the second quarter of last year, consumer loans increased by 16% and commercial loans and industrialists increased by 28%. Bank credits Laurel Road, a student loan refinancing platform for doctors and dentists acquired last April, with the strengthening of loan growth and the maintenance of credit quality. The groups served by Laurel Road naturally tend to have high incomes, which tends to make better customer credit.
• Average deposits are up 17% from Q2 2019 and deposit fees are down due to falling interest rates. However, low interest rates lower loan yields, which are down to 3.67% from 4.81% in the second quarter of 2019.
• In a earnings tracking call with Crain’s, Gorman said the bank was playing with the idea of a digital bank, but one that would serve a niche customer base like the one served by Laurel Road. This could be achieved by expanding and further developing the Laurel Road platform to enable virtual banking. A general virtual bank for all customers is of less interest, Gorman said, because Key sees it as little more than a source of high-cost deposits, and the bank has no trouble developing them. Serving a “homogeneous” group of customers exceptionally well, he said, is more in line with Key’s strategy.
• In terms of PPP loans, Key – the seventh lender in the country in terms of PPP loans by volume, and the fifth in Ohio – said he is now experimenting with a loan forgiveness portal which is expected to go live next month.
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