KeyCorp‘s (KEY) first quarter 2012 net income from continuing operations of 21 cents per share surpassed the Zacks Consensus Estimate by two cents. On the other hand, earnings demonstrated parity with the preceding quarter as well as the prior-year quarter.
Including discontinued operations, KeyCorp’s net income for the reported quarter was in line with the prior quarter at $194 million or 20 cents per share, and compared favorably with $173 million or 19 cents per share in the year-ago quarter.
Stable non-interest expenses and higher non-interest income were the result boosters. However, dwindling net interest income slightly subdued the results. Additionally, continued improvement in credit quality and robust capital ratios were the primary highlighters for the quarter.
Quarter in Detail
Total revenue for the reported quarter came in at $1,031 million, up 6% from $977 million in the prior quarter but down 3% from $1,061 million in the prior-year quarter. Total revenue substantially exceeded the Zacks Consensus Estimate of $998 million.
Tax-equivalent net interest income totaled $559 million compared with $563 million in the prior quarter and $604 million in the year-ago quarter. The moderate sequential fall reflected a write-off of $6 million of capitalized loan origination costs during the reported quarter. The year-over-year drop was driven by both a decline in earning assets and the net interest margin.
Net interest margin (NIM) improved 3 basis points (bps) sequentially but deteriorated 9 bps year-over-year to 3.16%. The sequential improvement was attributable to a persistent plunge in funding costs along with a reduction in lower yielding short-term investments balance. On the other hand, the narrowing spread between lending rates and funding costs accounted for the year-over-year weakening in the NIM.
Non-interest income surged 14% sequentially and 3% year over year to $472 million. The sequential upliftment was mainly due to elevated gains from principal investments and augmented investment banking and capital markets income, partly mitigated by decreases in corporate-owned life insurance, net gains from loan sales and other income.
Likewise, the year-over-year boost resulted from higher gains on leased equipment and increase in other income. However, these positives were partially mitigated by reductions in operating lease income as well as electronic banking fees.
Non-interest expense of $703 million was almost at par with the year-ago quarter but fell 2% sequentially. The fall in business services and professional fees as well as marketing expense, partially offset by higher provision for losses on lending-related commitments as well as other expenses resulted in the sequential decline. The year-over-year consistency was due to lower incentive compensation expenses offset by higher personnel expenses.
Credit Quality
Credit quality continued to display an improvement during the quarter. Nonperforming assets as a percentage of period-end portfolio loans, OREO assets as well as other nonperforming assets dipped 18 bps sequentially and 68 bps year-over-year to 1.55%. Also, net charge-offs as a percentage of average loans fell 4 bps sequentially and 77 bps year-over-year to 0.82%.
KeyCorp’s allowance for loan and lease losses was $0.9 billion or 1.92% of period-end loans as of March 31, 2012, compared with $1.0 billion or 2.03% of period-end loans as of December 31, 2011 and $1.4 billion or 2.83% of period-end loans as of March 31, 2011.
However, provision for loan and lease losses came in at $42 million compared with a credit of $22 million in the prior-quarter and a credit of $40 million in the prior-year quarter.
Capital Ratios
Capital ratios continued to strengthen during the quarter. KeyCorp’s tangible common equity to tangible assets ratio was 10.26% as of March 31, 2012, compared to 9.88% as of December 31, 2011 and 9.16% as of March 31, 2011. Tier 1 common equity ratio was 11.55%, compared with 11.26% at the end of the prior quarter and 10.74% at the end of the prior-year quarter.
KeyCorp originated approximately $8.3 billion in new or renewed lending commitments to consumers and businesses during the quarter compared with $6.9 billion in the prior-year quarter.
Expansion Plan
During the quarter, KeyCorp announced an agreement to acquire 37 retail banking branches in Buffalo and Rochester, NY. from First Niagara Financial Group (FNFG). The deposits and loans associated with these branches total nearly $2.4 billion and $400 million, respectively. The transaction is expected to close in early third quarter of 2012, and is subject to customary closing conditions and regulatory approval.
Peer Performances
M&T Bank Corporation (MTB), one of the peers of KeyCorp, significantly surpassed the Zacks Consensus Estimate. The results were facilitated by higher NIM and lower non-interest expenses. However, these were partly offset by a decline in non-interest income. Moreover, capital ratios were strong during the quarter.
Another peer of KeyCorp, Northern Trust Corporation (NTRS) also reported better results beating the Zacks Consensus Estimate by a penny. The results were aided by higher non-interest income, strong new business and improved equity markets, partially offset by a fall in net interest income. Also, improvement in credit quality was a positive.
Among other peers, SunTrust Banks Inc. (STI) is expected to announce its first quarter 2012 results on April 23.
Our Take
KeyCorp has shifted its focus on capital deployment activities after clearing the stress test, which will reinforce investors’ confidence on the stock. Moreover, the company’s business restructuring actions will likely continue to propel its credit quality and liquidity.
Also, the company’s strong capital position will facilitate acquisitions in the near term. However, the prevailing unfavorable economic scenario and shrinking of the core portfolio of the company fueled by weak demand and high competition are the major concerns.
KeyCorp currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, based on the fundamentals we maintain a long-term “Neutral” recommendation on the shares.
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