KeyCorp (KEY)

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KeyCorp (KEY)

Q2 2011 Earnings Call

July 19, 2011 9:00 am ET

Executives

William Koehler - President of Key Community Bank

Charles Hyle - Chief Risk Officer, Executive Vice President and Member of Executive Council

Beth Mooney - Chairman, Chief Executive Officer, President, Chief Operating Officer and Member of Executive Council

Christopher Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association

Jeffrey Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council

Analysts

Matthew Burnell - Wells Fargo Securities, LLC

Craig Siegenthaler - Crédit Suisse AG

Ken Zerbe - Morgan Stanley

Erika Penala - Merrill Lynch

Gerard Cassidy - RBC Capital Markets, LLC

Kenneth Usdin - Bank of America Securities

Terence McEvoy - Oppenheimer & Co. Inc.

Brent Erensel - Portales Partners

Michael Mayo - Credit Agricole Securities (USA) Inc.

Steven Alexopoulos - JP Morgan Chase & Co

Unknown Analyst -

Presentation

Operator

Good morning, and welcome to KeyCorp's 2011 Second Quarter Earnings Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Ms. Beth Mooney. Ms. Mooney, please go ahead.

Beth Mooney

Thank you, operator. Good morning, and welcome to KeyCorp's Second Quarter 2011 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer, and available for the Q&A portion of the call are the leaders of Key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler. Also joining us for the Q&A discussion are our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda.

Slide 2 is our forward-looking disclosure statement. It covers our presentation materials and comments, as well as the question-and-answer segment of our call today.

Now if you would turn to Slide 3. This morning, we announced second quarter net income from continuing operations attributable to common shareholders of $243 million or $0.26 per common share. These results are above the amounts reported in the first quarter of this year and the year-ago period.

Our improved performance reflected continued improvement in credit quality, good expense control and the successful execution of our business plan. Key's favorable credit quality trends have benefited from the improvement in the economy and the aggressive actions that were taken to exit higher risk lending activities and our early recognition and resolution of problem credit. This has resulted in Key's net charge-offs declining to their lowest level since the first quarter of 2008, and nonperforming assets has now declined for 7 consecutive quarters.

Another area of focus has been expense management, and our second quarter showed continued progress. We have benefited from the success of our Keyvolution initiative and other efforts to streamline our operations. Going forward, we expect that we will continue to identify additional expense-saving opportunities as this is a critical factor in producing value for our shareholders in a slower growth environment.

We're also leveraging our strong capital, balance sheet and liquidity position. By continuing to focus on meeting our clients' borrowing needs, Key originated approximately $9.5 billion in new or renewed loans and commitments during the second quarter as compared to $6.9 billion of new or renewed loans and commitments during the first quarter of 2011.

We were especially pleased by the growth in our C&I loan portfolio which was up 3.7% from the previous quarter. The increase was driven by activity in the industrial and REIT sectors, as well as increases in middle market lending in all 3 of our geographic regions. Based on what we are hearing from our corporate clients, as well as lower runoff from our exit portfolio, we expect to reach an inflection point in total loans during the second half of this year and we will be poised again for growth.

We've also been working on strategies to mitigate the impact from the implementation of the new regulation on debit card interchange fees. As we previously reported, we estimate the new limits on allowable interchange fees, which will become effective on October 1 will reduce our annual revenue by approximately $50 million to $60 million before the implementation of our mitigation strategy. These strategies will include both revenue enhancements, as well as expense save opportunities. They are focused on not only retaining but expanding our engaged client relationships, increasingly offering clients choices aligned with their needs and preferences, as well as a strong focus on our cost structure for our Consumer Payments business.

And the final item on this slide focuses in on capital management. Key ended the second quarter in a strong position, with our Tier 1 common equity ratio at 11.01% and our Tier 1 risk-based capital at 13.76%. These levels should place us in the top quartile of our peer group and position us for a successful transition to Basel III.

Our strong capital position provides us with the flexibility to make investments in our relationship businesses, look for opportunities to build market share and meet our clients' needs for credit and financial services as the economy improves. Additionally, our board also approved a quarterly dividend increase to $0.03 per common share for the second quarter of 2011.

On Slide 4, we show the progress that we are continuing to make on our long-term goal. On a number of these measures, we are currently within our targeted range, including being core-funded, maintaining a high-quality and diverse revenue mix and the successful completion of our Keyvolution initiative. And we are continuing to make progress on the other measures, such as returning to a moderate risk profile and bringing asset quality within our targeted range. And at the bottom of the slide, you can see that our return on assets for the second quarter was 1.23%, which was also within our targeted range. We continue to believe that as provision expense normalizes and we execute on our client insight relationship strategy, our results will be within our targeted range for return on average assets.

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