KeyCorp (KEY) reported a third quarter net income from continuing operations of 19 cents per share, substantially better than the Zacks Consensus Estimate of 3 cents. This also compares much favorably with a net loss from continuing operations of 50 cents in the prior-year quarter.
This marks KeyCorp’s second profitable quarter since the beginning of the financial crisis in early 2008. During the second quarter of 2010, KeyCorp bounced back to profitability after incurring significant losses for the last eight quarters. A significant decrease in provision for loan losses, solid expense management and improved fee income were the primary factors, which boosted results.
A strong capital position and continued improvement in credit quality across the majority of the loan portfolios in both Community Banking and National Banking were also among the positives. However, lower average earning assets and average interest-bearing deposits were the downside.
Total revenues for the reported quarter came in at $1.13 billion, up 15% from $0.98 billion in the prior-year quarter. Revenues were also better than the Zacks Consensus Estimate of $1.10 billion.
KeyCorp’s net income from continuing operations came in at $163 million, compared to a loss of $422 million in the prior-year quarter. The results for the year-ago quarter were significantly impacted by a higher loan loss provision.
Including discontinued operations, net income for the reported quarter came in at $178 million compared to a loss of $438 million in the year-ago quarter.
Quarter in Detail
Tax-equivalent net interest income increased 8% year-over-year to $647 million. This increase was primarily a result of a 55-basis-point (bps) increase in net interest margin (NIM) to 3.35% primarily due to reduced funding costs.
KeyCorp continues to experience an improvement in the mix of deposits. The improvement resulted from a lower level of high cost certificates of deposit and an increase in low cost transaction accounts, which the company expects to continue going forward, though at a slower pace.
Provision for loan losses for the reported quarter was $94 million, substantially down from $733 million in the prior-year quarter. KeyCorp’s allowance for loan losses was $2 billion or 3.81% of total loans, as on September 30, 2010, compared to $2.5 billion or 4.00% as on September 30, 2009.
Non-interest income for the quarter increased 27% year over year to $486 million. The year-over-year increase primarily reflects a $95 million increase in fee-based income. Non-interest income for the reported quarter also included a $12 million dividend from corporate-owned life insurance.
Non-interest expense for the quarter decreased 18% year-over-year to $736 million. Though net occupancy increased 11% year over year, a significant decrease in personnel and other non-personnel expenses kept overall expenses lower than the year-ago quarter.
Credit Quality
Credit quality significantly improved 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 40 bps sequentially to 3.48%. Net charge-offs as a percentage of average loans decreased 49 bps sequentially to 2.69%. Also, allowance for loan losses decreased 35 bps sequentially to 3.81% of period-end loans.
Capital Ratios
Capital ratios continued to improve during the third quarter of 2010. KeyCorp originated approximately $8.1 billion in new or renewed lending commitments to consumers and businesses during the quarter.
KeyCorp’s tangible common equity to tangible assets ratio was 8.00% as on September 30, 2010, compared to 7.65% at the end of the prior quarter and 7.58% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 14.26%, compared to 13.62% at the end of the prior quarter and 12.61% at the end of the prior-year quarter.
Though there are near-term challenges related to the difficult operating environment, we expect the business restructuring actions undertaken by the company to fuel its credit quality, capital position and liquidity.
KeyCorp currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, in the absence of any significant catalysts, we maintain a long-term Neutral recommendation on the stock.
KeyCorp shares were up about 3.7% in before-market trade following the announcement of third quarter results.
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