KeyCorp’s (KEY) second quarter 2011 net income from continuing operations of 26 cents per share substantially exceeded the Zacks Consensus Estimate of 20 cents. This also compared favorably with the prior quarter earnings of 21 cents and prior-year quarter loss of 5 cents.
Including discontinued operations, KeyCorp’s net income for the reported quarter came in at $234 million or 25 cents per share compared with a net income of $173 million or 19 cents per share and a loss of $67 million or 8 cents per share in the year-ago quarter.
Better-than-expected results were mainly due to lower credit cost and a decline in non-interest expenses. Additionally, with the repayment of TARP money, the financial burden of preferred dividends that were being paid to the U.S. Treasury has been eliminated. This also led to improved results during the quarter. However, lower net interest income and no-interest income were the downside.
Quarter in Detail
Total revenue for the reported quarter came in at $1.024 billion, down 3.5% from $1.061 billion in the prior quarter and 8.2% from $1.115 billion in the prior-year quarter. Total revenue also missed the Zacks Consensus Estimate of $1.028 billion.
Tax-equivalent net interest income (NII) decreased to $570 million from $604 million in the prior quarter and $623 million in the year-ago quarter. The year over year drop in NII was mainly driven by a decline in earning assets, partially mitigated by lower funding costs. However, net interest margin (NIM) improved 2 basis points (bps) year over year to 3.19% primarily due to reduced funding costs.
Non-interest income for the quarter fell 0.7% sequentially and 7.7% year over year to $454 million.
Non-interest expense for the quarter decreased 3.0% sequentially and 11.6% year over year to $680 million. Decline in other real estate owned (OREO) expense, operating lease expense and the Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums primarily kept the overall expense lower during the quarter.
Credit Quality
Credit quality continued to show improvement during the quarter. Non-performing assets as a percentage of portfolio loans, OREO assets as well as other non-performing assets decreased 25 bps sequentially to 1.96%. Also, net charge-offs as a percentage of average loans from continuing operations fell 48 bps sequentially to 1.11%.
KeyCorp’s allowance for loan losses was $1.3 billion or 2.57% of total loans, as of June 30, 2011, compared with $2.3 billion or 4.16% of total loans as of June 30, 2010. Provision for loan losses in the reported quarter was a credit of $8 million compared with a charge of $228 million in the prior-year quarter.
Capital Ratios
Capital ratios continued to improve during the second quarter. KeyCorp originated approximately $9.5 billion in new or renewed lending commitments to consumers and businesses during the quarter.
KeyCorp's tangible common equity to tangible assets ratio was 9.67% as of June 30, 2011, compared to 9.16% at the end of the prior quarter and 7.65% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 13.76%, compared to 13.48% at the end of the prior quarter and 13.62% at the end of the prior-year quarter.
Our Take
We expect that KeyCorp’s business restructuring actions will continue to fuel 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 maintaining Basel III norms.
KeyCorp currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, based on fundamentals we maintain a long-term “Neutral” recommendation on the shares.
KeyCorp's close competitor –– Fifth Third Bancorp (FITB) is scheduled to report on July 21.
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