Zacks_Analysts' Blog : KeyCorp Beats by a Penny - Analyst Blog

KeyCorp’s (KEY) fourth quarter 2011 net income from continuing operations of 21 cents per share came in just a penny ahead of the Zacks Consensus Estimate. However, this compares unfavorably with the prior-year quarter earnings of 33 cents.

Including discontinued operations, KeyCorp’s net income for the reported quarter came in at $194 million or 20 cents per share compared with $279 million or 32 cents per share in the year-ago quarter.

Better-than-expected results were mainly due to provision benefit and lower non-interest expenses. Continued improvement in credit quality and growth in commercial, financial and agricultural loan portfolio were also impressive. However, lower top line was the primary dampener.

For the full year 2011, net income from continuing operations was 92 cents, up 3 cents from the Zacks Consensus Estimate. This also compares favorably with 47 cents in the previous year.

Quarter in Detail

Total revenue for the reported quarter came in at $977 million, down 6% from $1,038 million in the prior quarter and 16% from $1,161 million in the prior-year quarter. Total revenue also missed the Zacks Consensus Estimate of $1,007 million.

For the full year, total revenue came in at $4.1 billion, in line with the Zacks Consensus Estimate. However, revenue was down 9% from $4.5 billion in the previous year.

Tax-equivalent net interest income increased 1% sequentially but decreased 11% year over year to $563 million. The year-over-year drop in net interest income was mainly due to both a decline in earning assets and the net interest margin. Net interest margin (NIM) improved 4 basis points (bps) sequentially but deteriorated 18 bps year over year to 3.31%.

Non-interest income decreased 14% sequentially and 21% year over year to $414 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 net gains from principal investing and other income.

Non-interest expense for the quarter increased 4% sequentially but declined 4% year over year to $717 million. The year-over-year fall was primarily due to lower FDIC deposit insurance premiums, reduced operating lease expense and reductions across several other expense categories, 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 period-end portfolio loans, OREO assets as well as other nonperforming assets decreased 16 bps sequentially to 1.73%. Also, net charge-offs as a percentage of average loans fell 4 bps sequentially to 0.86%.

KeyCorp’s allowance for loan and lease losses was $1.0 billion or 2.03% of period-end loans as of December 31, 2011, compared with $1.1 billion or 2.35% of period-end loans as of September 30, 2011. Provision for loan and lease losses was a credit of $22 million compared with a charge of $10 million in the prior-quarter and a credit of $97 million in the prior-year quarter.

Capital Ratios

Capital ratios continued to improve during the quarter. KeyCorp originated approximately $10.5 billion in new or renewed lending commitments to consumers and businesses during the quarter.

KeyCorp's tangible common equity to tangible assets ratio was 9.88% as of December 31, 2011, compared to 9.82% at the end of the prior quarter and 8.19% at the end of the prior-year quarter. Tier 1 common equity ratio was 11.28%, compared with the same at the end of the prior quarter and 9.34% at the end of the prior-year quarter.

Our Take

Although KeyCorp’s financials are expected to be affected by the volatile operating environment, added costs related to the Basel III and new financial regulations, its business restructuring actions should continue fueling its credit quality and liquidity. Moreover, stable capital position puts the company in an advantageous position for acquisitions, share repurchases and dividend hike in the near term.

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. KeyCorp's competitor –– Fifth Third Bancorp (FITB) retains a Zacks #2 Rank (short-term Buy rating).