Two analysts warned Wednesday that KeyCorp's third-quarter results could be hurt by softness in the capital markets and slackening loan growth.
"We think the latter part of the third quarter must improve in order for the company to meet consensus," said Kenneth Hemauer, a banking analyst at Robert W. Baird & Co. in Milwaukee, referring to the analysts' mean estimate of 62 cents a share for the quarter for the Cleveland-based banking company .
Mr. Hemauer said that revenues from investment banking through KeyCorp's McDonald & Co. were not as strong as expected early in the quarter and that the market for securitizations has become "less friendly in recent months," conditions that may restrict some of the revenues anticipated from loan sales in the second half.
Michael Mayo of Credit Suisse First Boston, who has lowered earnings targets for several major banks for similar reasons, said the reduction in his projection for KeyCorp is "due to concerns about market sensitive revenues, including investment banking and capital markets."
KeyCorp shares slipped 37.5 cents, to $27.625, amid a broad selloff, as a positive report on consumer prices failed to convince investors that the Federal Reserve's open market committee would refrain from another rate hike at its October meeting.
Mr. Mayo, who took action after meeting with KeyCorp management, lowered his earnings estimate to 60 cents a share for the quarter and $2.35 eight cents below consensus for the year.
He said revenue from investment banking is likely to slip to $66 million or lower, from the $100 million KeyCorp took in in the second quarter.
"The company also expressed an unknown impact to capital markets due to Y2K factors," Mr. Mayo said.
"This is another data point showing that banks are likely to fall short of expectations due to capital markets and potentially other weakness,"
Mr. Hemauer was slightly more sanguine about KeyCorp, noting that "credit quality trends are generally stable and look to remain so over the foreseeable future." Loan growth is expected to slow modestly but could settle into "a very acceptable range" of 8% to 10%, he said.
Bank stocks were mixed on Wednesday, as news on the consumer price index did little to calm investors' jitters.
The Labor Department's index rose 0.03%, as expected. Excluding food and energy costs, the core number rose just 0.1% in August, its slowest growth rate in 33 years.
Economists said the report showed that inflation is in check, but they said the continued strength of the economy would cause the Federal Reserve to ponder an interest rate increase when it next meets in October.
"The numbers were good, but not good enough not to get the Fed to raise rates," said Scott J. Brown, senior economist with Raymond James & Associates of St Petersburg, Fla. "Growth is still pretty strong, suggesting inflation may pop up down the road."
"Core inflation remains totally absent, but the unrelenting strength of the economy will probably lead the Fed to tighten policy," said Bruce Steinberg, chief economist at Merrill Lynch World Markets.
For the day, the Standard & Poor's bank index fell 1.38% and the Nasdaq bank index gained 0.40%.
The Dow Jones industrial average was down 1% and the S&P 500 1.37%
Aside from rate worries, "The cash flow into equity mutual funds has slowed," said Gerard Cassidy, a banking analyst at Tucker Anthony Cleary Gull in Boston. "It's creating a general cloud over the market," Mr. Cassidy said. "Plus, you have a very nervous group of investors waiting for which way the Fed will go." ?