KeyCorp’s (KEY) first quarter loss from continuing operations of 11 cents per share was substantially better than the Zacks Consensus Estimate of a loss of 29 cents. This also compares favorably with a net loss from continuing operations of $1.03 in the prior-year quarter.
Results for the reported quarter primarily benefited from a decrease in provision for loan losses and lower non-interest expenses. A strong capital position was also among the positives. However, pressure on the top-line, primarily as a result of lower non-interest income and slothful growth in average earning assets, was among the downside.
KeyCorp’s net loss from continuing operations came in at $98 million, compared to $507 million in the prior-year quarter. The results for the year-ago quarter were significantly impacted by a higher loan loss provision and intangible assets impairment charge.
Behind the Headlines
Tax-equivalent net interest income increased 6.2% year-over-year to $632 million. This increase was primarily a result of a 40 basis-points (bps) increase in net interest margin (NIM) to 3.19% due primarily to reduced funding costs and improved yields on loans.
KeyCorp has experienced an improvement in the mix of deposits during last year. This has resulted in a lower level of high-cost certificates of deposit and an increase in low-cost transaction accounts, which the company expects to continue.
Provision for loan losses for the reported quarter was $413 million, compared to $847 million in the prior-year quarter. KeyCorp’s allowance for loan losses was $2.4 billion, or 4.34% of total loans, as on Mar 31, 2010, compared 2.88% as on Mar 31, 2009.
Non-interest income for the quarter decreased 4.1% sequentially and 5.9% year-over-year to $450 million. The year-over-year decrease reflects a $105 million gain from the sale of Visa Inc. (V) shares in the year-ago quarter.
Non-interest expense for the quarter decreased 9.9% sequentially and 15.3% year-over-year to $785 million. On a year-over-year basis, personnel expense increased by $3 million while non-personnel expense increased by $51 million, reflecting increases of $26 million in costs associated with other real estate owned assets, including write-downs and losses on sales, and various other expense categories.
Questions Regarding Credit Quality
Credit quality metrics were mixed during the quarter. Non-performing assets as a percentage of portfolio loans, other real estate owned assets as well as other non-performing assets increased 6 bps sequentially to 4.31%. However, net charge-offs as a percentage of average loans decreased 97 bps sequentially to 3.67%.
Evaluation of Capital Ratios
Capital ratios continued to improve during the first quarter of 2010. KeyCorp originated approximately $5.3 billion in new or renewed lending commitments to consumers and businesses during the quarter. KeyCorp’s tangible common equity to tangible assets ratio was 7.37% as on Mar 31, 2010, compared to 7.56% at the end of the prior quarter and 6.06% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 12.96%, compared to 12.75% at the end of the prior quarter and 11.22% at the end of the prior-year quarter.
While the results continue to be affected by the difficult operating environment, we expect that the business restructuring actions undertaken by the company will fuel its credit quality, capital position and liquidity. We remain conservative on the company’s outlook, though the degree of pessimism is subdued with the early sign of recovery of certain metrics.
Since the announcement of results, the share price of KeyCorp has increased 10.4%.
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