) reported its third quarter 2012 net income from continuing
operations of 23 cents per share, surpassing the Zacks Consensus
Estimate of 21 cents. The results were in line with the prior
quarter but compared unfavorably with the year-ago quarter
earnings of 24 cents.
Including discontinued operations, the company's net income for
the reported quarter came in at $214 million or 23 cents per
share, down from $231 million or 24 cents in the prior quarter
but up from $212 million or 22 cents in the year-ago period.
Improved non-interest income as well as net interest income,
continued improvement in credit quality and robust capital ratios
were the primary highlights for the quarter. However, escalating
operating expenses slightly subdued the results.
Quarter in Detail
KeyCorp's total revenue came in at $1.12 million, rising 9.0%
from the prior quarter and 8.1% from prior-year quarter.
Moreover, total revenue was 9.3% ahead of the Zacks Consensus
Estimate of $1.03 billion.
Tax-equivalent net interest income totaled $578 million, climbing
6.3% from $544 million in the prior quarter. Net interest margin
(NIM) also increased 17 basis points (bps) sequentially to
The improvement was attributable to declining funding costs,
the redemption of trust preferred securities, maturity of
long-term debt, the maturity of higher rate certificates of
deposits and acquisition of credit card portfolio. However, these
positives were partly offset by write-off of fees and capitalized
loan origination costs from the early termination of leveraged
Non-interest income grew 12.2% sequentially to $544 million. The
sequential upliftment was a result of elevated trust and
investment services income, service charges on deposit accounts,
gains on leased equipment, insurance income, net gains from loan
sales and other income.
However, these were partly mitigated by lower operating lease
income, letter of credit and loan fees, corporate-owned life
insurance income and net gains from principal investments.
Non-interest expense inched up 2.8% from the prior quarter to
$734 million. The rise was mainly attributable to increased
personnel expenditure, net occupancy costs, marketing
expenditure, intangible asset amortization on credit cards as
well as higher other intangible asset amortization and other
These were partially offset by a marginal fall in operating
lease expense, business services and professional fees, other
real estate owned (OREO) expense, net and Federal Deposit
Insurance Corporation (FDIC) assessment costs.
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Credit quality continued to display an improvement during the
quarter. Non-performing assets, as a percentage of period-end
portfolio loans, OREO assets as well as other non-performing
assets dipped 12 bps sequentially and 50 bps year-over-year to
1.39%. Also, net charge-offs as a percentage of average loans
increased 23 bps sequentially, but fell 4 bps year over year to
KeyCorp's allowance for loan and lease losses was $0.89 billion
or 1.73% of period-end loans as of September 30, 2012, compared
with $0.89 billion or 1.79% of period-end loans as of June 30,
2012 and $1.13 billion or 2.35% of period-end loans as of
September 30, 2011.
However, provision for loan and lease losses came in at $109
million, substantially higher than $21 million recorded in the
prior quarter and $10 million in the prior-year quarter.
As of September 30, 2012, KeyCorp had total assets of $87.0
billion compared with $86.5 billion at June 30, 2012, and $89.3
billion at September 30, 2011.
Total deposits came in at $64.2 billion, up from $62.2 billion in
the prior quarter and $61.0 billion in the year-ago period.
Capital ratios continued to strengthen during the reported
quarter. KeyCorp's tangible common equity to tangible assets
ratio was 10.39% as of September 30, 2012, compared with 10.44%
as of June 30, 2012 and 9.82% as of September 30, 2011. In
addition, Tier 1 common equity ratio was 11.43%, compared with
11.63% at the end of the prior quarter and 11.28% at the end of
the prior-year quarter.
KeyCorp originated approximately $9.0 billion in new or renewed
lending commitments to consumers and businesses during the
quarter, compared with $10.3 billion issued in the prior quarter.
During the quarter, KeyCorp bought back 9.6 million shares worth
$82 million. Following these repurchases, KeyCorp has remaining
authority to repurchase up to $177 million of its common shares
under its new share repurchase program, which has no expiration
In August, KeyCorp announced a couple of strategic measures to
reinforce its consumer and commercial payments businesses. These
initiatives include the acquisition of credit card assets worth
$725 million from Elan Financial Services and an amendment of its
merchant services agreement with Elavon, Inc.
In July, KeyCorp completed the acquisition of 37 retail banking
branches in Buffalo and Rochester, NY from
First Niagara Financial Group
). The deposits and loans associated with these branches amounted
nearly $2.4 billion and $400 million, respectively.
KeyCorp's extensive capital deployment activities will continue
to reinforce investors' confidence in the stock. Moreover, the
company's business restructuring efforts are likely to 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 the shrinking core portfolio of
the company, fueled by weak demand and high competition, are the
KeyCorp currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. However, considering the fundamentals,
we maintain a long-term Outperform recommendation on the