KeyCorp's Profit May Dip Even as Net Interest Margin Climbs

 KeyCorp (KEY) will probably say profits fell in the fourth quarter as higher expenses and lower overdraft revenue offset its widest net interest margin in almost three years.

Net income fell about a sixth to $507.8 million, or earnings per share (EPS) of $0.54, as revenue dropped by about 1% to $1.9 billion, according to estimates from Visible Alpha.

Higher interest rates have been a boon for many banks in the past year, allowing them to widen net interest margins. Yet KeyCorp said in December that it earned less from overdrafts after lowering customer fees, and said a pension settlement boosted expenses, as well as higher incentive compensation, and charges due to reductions in office space. It also said its expenses would be at the higher range of expectations because of pension settlement charges, higher incentive compensation, and charges due to reduction in office space, raised expenses.

KeyCorp shares are down by 29% in the past year, compared with a 10% drop in the S&P 500 Financial Sector Index.

^{Source: Visible Alpha}

The Key Metric: Net Interest Margin

Net interest margin is a key metric reflecting the difference between net interest income and interest expenses. Banks generate interest income from business loans and mortgages and pay out interest on deposit accounts. When interest rates are low, it's difficult for banks to have a wide margin. Conversely, a period of high interest rates allows banks to increase interest income faste than interest expenses, widening the net interest margin.

KeyCorp will likely its margins widened to 2.89% in the fourth quarter as the Federal Reserve raised benchmark rates to the highest in 15 years.