KeyCorp’s (KEY) third quarter 2011 net income from continuing operations of 24 cents per share came in 3 cents ahead of the Zacks Consensus Estimate. This also compared favorably with the prior-year quarter earnings of 19 cents.
Including discontinued operations, KeyCorp’s net income for the reported quarter came in at $212 million or 22 cents per share compared with $178 million or 20 cents per share in the year-ago quarter.
Better-than-expected results were mainly due to lower provision for loan and lease losses and decline in non-interest expenses. Improving credit quality and growth in commercial, financial and agricultural loan portfolio were also impressive. However, lower net interest income was the primary dampener.
Quarter in Detail
Total revenue for the reported quarter came in at $1.038 billion, up 1% from $1.024 billion in the prior quarter but down 8% from $1.133 billion in the prior-year quarter. Total revenue surpassed the Zacks Consensus Estimate of $1.011 billion.
Tax-equivalent net interest income decreased 3% sequentially and 14% year over year to $555 million. The year-over-year drop in net interest income was mainly due to both a decline in earning assets and tighter spread between asset yields and funding costs. Net interest margin (NIM) deteriorated 10 basis points (bps) sequentially and 26 bps year over year to 3.09%.
Non-interest income increased 6% sequentially but decreased 1% year over year to $483 million. The year-over-year decrease was attributable to lower investment banking and capital markets income, operating lease income and corporate-owned life insurance income, partially offset by increases in net gains from principal investing and other income.
Non-interest expense for the quarter increased 2% sequentially but declined 6% year over year to $692 million. The year-over-year fall was primarily due to lower FDIC deposit insurance premiums and reduced operating lease expense, partially offset by an increase in personnel expense.
Credit Quality
Credit quality continued to show an improvement during the quarter. Nonperforming assets as a percentage of portfolio loans, OREO assets as well as other nonperforming assets decreased 9 bps sequentially to 1.89%. Also, net charge-offs as a percentage of average loans fell 21 bps sequentially to 0.90%.
KeyCorp’s allowance for loan and lease losses was $1.1 billion or 2.35% of period-end loans, as of September 30, 2011, compared with $1.2 billion or 2.57% of period-end loans as of June 30, 2011. Provision for loan and lease losses was a charge of $10 million compared with a credit of $8 million in the prior quarter and a charge of $94 million in the prior-year quarter.
Capital Ratios
Capital ratios continued to improve during the quarter. KeyCorp originated approximately $9.7 billion in new or renewed lending commitments to consumers and businesses during the quarter.
KeyCorp's tangible common equity to tangible assets ratio was 9.82% as of September 30, 2011, compared to 9.67% at the end of the prior quarter and 8.00% at the end of the prior-year quarter. Tier 1 common equity ratio was 11.34%, compared to 11.14% at the end of the prior quarter and 8.61% at the end of the prior-year quarter.
Our Take
Although KeyCorp’s results are likely to be affected by the volatile operating environment and added costs of complying with the Basel III norms, we expect the company’s business restructuring actions to continue fueling its credit quality, capital position and liquidity.
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) also retains a Zacks #3 Rank.
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