KeyCorp Sustains Profit Trend - Analyst Blog

KeyCorp (KEY) reported fourth quarter net income from continuing operations of 33 cents per share, handily beating the Zacks Consensus Estimate of 13 cents. This also compares favorably with net loss from continuing operations of 30 cents in the prior-year quarter.

This marks KeyCorp's third straight quarter of profit since the beginning of the financial crisis in early 2008. During the second quarter of 2010, KeyCorp bounced back to profitability after incurring significant losses in the last eight quarters. A significant improvement in provision for loan losses, solid expense reduction and enhanced non-interest income were the primary factors boosting results.

A strong capital position and continued improvement in credit quality across the majority of loan portfolios in both Community Banking and Corporate Banking were also among the positives. However, lower average earning assets and average interest-bearing deposits were the downside.

For full year 2010, earnings from continuing operations came in at 47 cents per share, substantially better than the loss of $2.27 in 2009. This was also ahead of the Zacks Consensus Estimate of 27 cents.

Total revenue for the reported quarter came in at $1.2 billion, up 5% from $1.1 billion in the prior-year quarter. Revenues also scaled ahead of the Zacks Consensus Estimate of $1.1 billion.

For the full year, total revenue was $4.5 billion, up 1% from $4.4 billion in 2009. This also compares positively with the Zacks Consensus Estimate of $4.4 billion.

KeyCorp's net income from continuing operations for the quarter came in at $292 million compared to a loss of $258 million in the prior-year quarter. The results for the year-ago quarter were significantly impacted by a higher loan loss provision.

Including discontinued operations, net income for the reported quarter came in at $279 million compared to a loss of $265 million in the year-ago quarter. For the full year, net income attributable to common shareholders was $390 million compared with a loss of $1.6 billion in 2009.

Quarter in Detail

Tax-equivalent net interest income decreased to $635 million from $637 million in the year-ago quarter. Net interest margin (NIM) improved 27 basis points (bps) year over year to 3.31% primarily due to reduced funding costs. The benefit of improved NIM was partially offset by a decrease in average earning assets.

KeyCorpcontinues to experience an improvement in the mix of deposits. The improvement resulted from a lower level of high cost certificates of deposit and an increase in low cost transaction accounts, which is expected to continue going forward, though at a slower pace.

Provision for loan losses in the reported quarter was a credit of $97 million compared with a charge of $756 million in the prior-year quarter. KeyCorp's allowance for loan losses was $1.6 billion or 3.20% of total loans, as of December 31, 2010, compared to $2.5 billion or 4.31% of total loans as of December 31, 2009.

Non-interest income for the quarter increased 12% year over year to $526 million. The year-over-year growth primarily reflects a $110 million increase in investment banking and capital markets income.

Non-interest expense for the quarter decreased 15% year over year to $744 million. A decline in employee benefits expense stemming from lower pension expense and medical claims expense primarilykept overall expense lower than the year-ago quarter.

Also, the company recorded a credit of $26 million to the provision for losses on lending-related commitments compared with a charge of $27 million a year earlier.

Credit Quality

Credit quality significantly improved during the quarter. Non-performing assets as a percentage of portfolio loans, other real estate owned assets as well as other non-performing assets decreased 82 bps sequentially to 2.66%.

Net charge-offs as a percentage of average loans from continuing operations decreased 69 bps sequentially to 2.00%. Also, allowance for loan losses decreased 61 bps sequentially to 3.20% of period-end loans.

Capital Ratios

Capital ratios continued to improve during the fourth quarter. KeyCorp originated approximately $8.5 billion in new or renewed lending commitments to consumers and businesses during the quarter.

KeyCorp's tangible common equity to tangible assets ratio was 8.19% as of December 31, 2010, compared to 8.00% at the end of the prior quarter and 7.56% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 15.10%, compared to 14.30% at the end of the prior quarter and 12.75% at the end of the prior-year quarter.

Our Viewpoint

While KeyCorp's results continue to be slightly affected by the volatile operating environment, we expect its business restructuring actions to fuel its credit quality, capital position and liquidity. Also, KeyCorp is expected to benefit from its focus on community banking expansion.

KeyCorp currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold' rating. However, based on its strong earnings and improving fundamentals we maintain a long-term “Outperform” recommendation on the shares.

Last week, KeyCorp's competitor––Fifth Third Bancorp (FITB) reported better-than-expected fourth quarter earnings. Concurrent with its earnings release, the company also announced its plan to repay the bailout money received under the Treasury's Troubled Asset Relief Program.

 
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