Lower expenses drove KeyCorp.’s (KEY) fourth-quarter 2014 adjusted earnings from continuing operations of 29 cents per share, which outpaced the Zacks Consensus Estimate of 26 cents. Moreover, the figure was up 3.6% from the year-ago adjusted figure of 28 cents.
Better-than-expected results were attributable to a rise in non-interest income and lower expenses, partly offset by an increase in provision for loan and lease losses, and a slight fall in net interest income. Continued improvement in asset quality, growth in loan and deposit balances as well as strong capital ratios marked other highlights.
After considering costs related to efficiency initiatives and a pension settlement charge, net income from continuing operations attributable to common shareholders in the reported quarter came in at $246 million or 28 cents per share, up from $229 million or 26 cents per share in the year-ago quarter.
For 2014, net income from continuing operations attributable to common shareholders (including the above-mentioned charges) was $917 million or $1.04 per share. This was up from $847 million or 93 cents recorded in 2013.
Behind the Headlines
Total revenue came in at $1.08 billion, up 3.5% from the prior-year quarter. Further, it was above the Zacks Consensus Estimate of $1.04 billion.
For 2014, total revenue came in at $4.11 billion, stable year over year. Also, it compared favorably with the Zacks Consensus Estimate of $4.08 billion.
Tax-equivalent net interest income (“NII”) fell marginally from the prior-year quarter to $588 million. Likewise, net interest margin (“NIM”) from continuing operations decreased 7 basis points (bps) year over year to 2.94%. The decline in both NII and NIM was mainly due to lower earning asset yields as well as higher levels of excess liquidity, owing to commercial deposit growth.
Non-interest income grew 8.2% year over year to $490 million. The rise was mainly attributable to higher investment banking and debt placement fees, corporate services income and corporate-owned life insurance income. These were, however, partially offset by a decrease in operating lease income and other leasing gains, mortgage servicing fees and other income.
Non-interest expense inched down 1.1% from the prior-year quarter to $704 million. The decrease was mainly due to a fall in business services and professional fees, net occupancy costs and marketing expenses, partly offset by a rise in personnel expenses.
As of Dec 31, 2014, average total deposits came in at $69.1 billion, up 2% year over year. Further, average total loans were $56.5 billion, up 5.5% from Dec 31, 2013.
Credit Quality
Credit quality continued to improve during the quarter except provision for loan and lease losses, which increased 15.8% year over year to $22 million. Nevertheless, nonperforming assets, as a percentage of period-end portfolio loans, other real estate owned properties (“OREO”) assets and other nonperforming assets, were 0.76%, down 21 bps year over year.
Also, net loan charge-offs, as a percentage of average loans, decreased 5 bps year over year to 0.22%. KeyCorp’s allowance for loan and lease losses was $794 million, down 6.4% from the year-ago quarter.
Capital Ratios
Capital ratios were strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 9.88% as of Dec 31, 2014, up from 9.80% as of Dec 31, 2013. In addition, Tier 1 common equity ratio was 11.18% versus 11.22% as of Dec 31, 2013. Again, Tier 1 risk-based capital ratio was 11.91% versus 11.96% as of Dec 31, 2013.
The company’s estimated Basel III Tier 1 common ratio was 10.69% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.
Share Repurchases
During the reported quarter, KeyCorp bought back 9.8 million shares for $128 million. The company’s 2014 capital plan includes share buyback of up to $542 million through first-quarter 2015.
Our Take
The low interest rate environment and stringent regulatory restrictions remain the major concerns, exerting pressure on the company’s top line. However, a decline in expenses and an efficient organic growth strategy should continue to support KeyCorp’s long-term performance. Also, we are optimistic about the company’s strong balance sheet and capital position.
At present, KeyCorp has a Zacks Rank #3 (Hold).
Performance of Other Major Banks
Among other major regional banks, U.S. Bancorp (USB), SunTrust Banks, Inc. (STI) and Comerica Incorporated (CMA) surpassed the Zacks Consensus Estimate. For U.S. Bancorp and Comerica, the beat was mainly driven by a rise in non-interest income, while SunTrust’s beat was largely brought about by a marginal increase in net interest income and lower provision for credit losses.
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