KeyCorp’s (KEY) fourth quarter loss from continuing operations of 30 cents per share was lower than the Zacks Consensus Estimate of a loss of 39 cents. This also compares favorably to a net loss from continuing operations of $1.07 cents in the prior-year quarter.
Results were primarily hurt by an increase in the provision for loan losses, write-downs of certain commercial real estate related investments and costs associated with other real estate owned (OREO). The downside also resulted from a 56.3% year-over-year increase in loan loss reserve to $2.5 billion, representing 4.31% of period-end loans.
Provision for loan losses was $756 million, compared to $551 million in the prior-year quarter. It exceeded net loan charge-offs by $48 million as KeyCorp continued to add to its reserves.
For full-year 2009, KeyCorp’s net loss from continuing operations came in at $1.6 billion or $2.27 per share, compared to $1.3 billion or $2.97 per share in the previous year.
Behind the Headlines
Tax-equivalent net interest income increased 6.3% sequentially to $637 million. This increase was primarily a result of a 24 basis-points (bps) increase in net interest margin (NIM) to 3.04% primarily as a result of reduced funding costs attributable to the re-pricing of certain deposits and the shift to a lower cost mix of deposits.
Non-interest income for the quarter increased 22.8% sequentially and 22.5% year-over-year to $469 million. The year-over-year increase was primarily attributable to an $80 million gain resulting from principal investing and a $22 million increase in investment banking income.
Non-interest expense for the quarter decreased 3.3% sequentially and 31.1% year-over-year to $871 million. On a year-over-year basis, personnel expense decreased $5 million. Non-personnel expense increased by $77 million, reflecting increases of $34 million in the FDIC deposit insurance assessment, $32 million in the provision for losses on lending-related commitments and $19 million in costs associated with OREO, including write-downs and losses on sales.
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 decreased 21 bps sequentially to 4.25%. However, net charge-offs as a percentage of average loans increased 105 bps sequentially to 4.64%.
Evaluation of Capital Ratios
Capital ratios continued to improve during fiscal 2009 as KeyCorp successfully completed a series of capital raises and exchanges that generated approximately $2.4 billion of new Tier 1 common equity. KeyCorp’s tangible shareholders’ equity to tangible assets ratio was 10.50% at the end of Dec 31, 2009, compared to 10.41% at the end of the prior quarter and 8.92% at the end of the prior-year quarter. Tier 1
risk-based capital ratio was 12.68%, compared to 12.61% in the prior quarter and 10.92% in the prior-year quarter.
Though we expect the company to benefit by exiting risky and unprofitable businesses, elevated provision requirements and weak credit quality will stretch profitability.
Read the full analyst report on “KEY”
Zacks Investment Research
