KeyCorp (KEY)

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KeyCorp. (KEY)

Q1 2014 Earnings Call

April 17, 2014 9:00 am ET

Executives

Beth E. Mooney - Chairman of The Board, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee and Chairman of Enterprise Risk Management Committee

Donald R. Kimble - Chief Financial Officer and Member of Executive Council

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

William L. Hartmann - Chief Risk Officer, Senior Executive Vice President, Member of Enterprise Risk Management Committee and Member Executive Council

Analysts

Robert Placet - Deutsche Bank AG, Research Division

Erika Najarian - BofA Merrill Lynch, Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Kenneth M. Usdin - Jefferies LLC, Research Division

Keith Murray - ISI Group Inc., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Michael Mayo - CLSA Limited, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Christopher M. Mutascio - Keefe, Bruyette, & Woods, Inc., Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Presentation

Operator

Good morning, and welcome to KeyCorp's First Quarter 2014 Earnings Conference Call. This call is being recorded.

At this time, I'd like to turn the conference over to Beth Mooney, Chairman and CEO. Please go ahead, ma'am.

Beth E. Mooney

Thank you, operator. Good morning, and welcome to the KeyCorp's first quarter 2014 earnings conference call.

Joining me for today's presentation is Don Kimble, our Chief Financial Officer. And available for the Q&A portion of the call are Chris Gorman, President of our Corporate Bank; and Bill Hartman, our Chief Risk officer.

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

Turning now to Slide 3. This was a good quarter for Key with solid financial results. We delivered on our commitments to generate positive operating leverage, to maintain strong risk management practices and to remain disciplined in the way we manage capital. Our positive operating leverage from the prior year reflects the work we have done to improve efficiency with initiatives targeted for both revenue and expense, and this becomes even more critical given the slow recovery and revenue headwinds that continue to impact our industry.

Key's revenue in the first quarter was relatively stable with the prior year and down modestly from the prior quarter, reflecting normal seasonal trends and lower activity level. Revenue benefited from solid loan growth, which continued to outpace the industry. Loan growth was driven by our commercial, financial and agricultural loans, which were up $1.2 billion or 5% on annualized from the prior quarter. We have been pleased with the quality of our new loan originations, but we continue to see loan yields reflecting the competitive pricing environment.

Noninterest income, benefited from areas where we have been investing, including credit card and payments and commercial mortgage servicing.

We have also made significant progress on expenses, which were down $19 million or 3% from the prior year end -- prior year quarter and down $50 million or 7% from the fourth quarter. Our cash efficiency ratio was 65%, which was within our targeted range. We remain committed to further efficiency improvement, and Don will discuss our path forward in his remarks.

Our strong risk management practices and a more favorable environment resulted in another quarter of positive credit quality trends. Net charge-offs declined to 15 basis points, aided by strong recoveries as well as our improving credit quality and we are well below our targeted range. Additionally, nonperforming assets declined 33% from the year ago period, and capital management remains a priority.

We were pleased to receive a non-objection from the Federal Reserve on our 2014 capital plan. This will allow us to repurchase up to $542 million in common shares and subject to board approval, increase our quarterly common share dividend 18% to $0.065 per share. Using Street estimates, our total shareholder payout would be in the 84% range, among the highest in our peer group for the second consecutive year.

Additionally, we completed our 2013 CCAR capital plan with common share repurchases of $141 million in the first quarter.

I'm now turning to Slide 4. During the first quarter, we made a number of leadership changes to leverage our alignment, accelerate momentum and to drive growth. Last week, we announced that Dennis Devine and E.J. Burke will be co-Presidents of our Community Bank. Dennis will focus on retail banking and small business clients, and E.J. will be responsible for our commercial and business banking, as well as our Private Bank. Based on their experience and proven leadership, we feel they are perfect fit for these new roles.

Since joining Key in 2012, Dennis has made significant progress in sharpening our consumer and small business strategy, while also realigning resources to sustainably improve productivity and performance. His new leadership role in the Community Bank reflects the importance of consumer and small business banking to the overall success of Key and our intent to drive this business forward.

E.J. is a 14-year veteran of Key. His strong leadership, successful transformation of our real estate business and other broad accomplishments in the Corporate Bank will help drive our Commercial Business and Private Banking segments, while further deepening the collaboration of these Community Bank areas with our corporate bank, an important component of our unique business model. Both Dennis and E.J. will join our executive leadership team and report directly to me.

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