KeyCorp Beats on Q1 Earnings - Analyst Blog

KeyCorp.'s KEY first-quarter earnings from continuing operations came in at 26 cents per share, surpassing the Zacks Consensus Estimate of 24 cents on the back of lower provisions and prudent expense management. Moreover, this was up 23.8% from the year-ago quarter figure of 21 cents per share.

KeyCorp's share price gained more than 1% in the pre-trading session thereby reflecting positive investor response. The movement of the stock price during the full trading session will give a better idea about whether KeyCorp has been able to meet expectations.

Results benefited from lower expenses, a decline in provision for loan and lease losses and higher fee income. However, the pressure on interest income persisted, given a still low interest rate scenario. Further, continued improvement in asset quality, growth in loan and deposit balances, along with strong capital ratios were the other highlights of the quarter.

Net income from continuing operations attributable to common shareholders came in at $232 million, up 18.4% year over year.

Behind the Headlines

KeyCorp's total revenue came in at $1.00 billion, down 1.0% from the prior-year quarter. However, it was almost in line with the Zacks Consensus Estimate.

Tax-equivalent net interest income (NII) fell 3.0% from the prior-year quarter to $569 million. Likewise, net interest margin NIM decreased 24 basis points (bps) year over year to 3.00%. The decline in both NII and NIM was mainly due to a fall in earning assets yields and loan fees, partially offset by loan growth, maturity of higher-rate certificates of deposit and a favorable mix of lower-cost deposits.

Non-interest income grew 2.4% year over year to $435 million. The rise was largely attributable to increase in mortgage servicing fees and net gains from principal investing, partially offset by decrease in consumer mortgage income.

Non-interest expense fell 2.8% from the prior-year quarter to $662 million. The decrease was due to lower personnel expense as well as non personnel expense.

As of Mar 31, 2014, total deposits came in at $67 billion, up 4.0% from $65 billion as of Mar 31, 2013. Further, total loans were $55 billion, up 5.5% from Mar 31, 2013.

Credit Quality

Credit quality continued to improve during the quarter. Nonperforming assets, as a percentage of period-end portfolio loans, OREO assets and other nonperforming assets, were 0.85%, down 49 bps year over year. Moreover, net loan charge-offs, as a percentage of average loans, decreased 23 bps year over year to 0.15%.

KeyCorp's allowance for loan and lease losses was $834 million, down 6.6% from the year-ago quarter. Further, provision for loan and lease losses came in at $6 million, down 89.1% year over year.

Capital Ratios

Though capital ratios deteriorated during the first quarter, these continued to remain strong. KeyCorp's tangible common equity to tangible assets ratio was 10.14% as of Mar 31, 2014, compared with 10.24% as of Mar 31, 2013. In addition, Tier 1 common equity ratio was 11.22% versus 11.40% as of Mar 31, 2013.

The company's estimated Basel III Tier 1 common ratio was 10.67% at the end of the reported quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.

Share Repurchase

During the reported quarter, KeyCorp bought back shares worth $141 million.

KeyCorp's 2014 capital plan was approved by the Federal Reserve following the Comprehensive Capital Analysis and Review this year. In accordance with the approval, the company's board of directors authorized share repurchases of up to $542 million through first-quarter 2015.

The capital plan also included a proposed hike in the company's regular quarterly dividend to $0.065 per share from the earlier payout of $0.055 per share. However, the same is yet to be approved by the board of directors.

Our Take

A decline in expenses and organic growth strategies will continue supporting KeyCorp's long-term performance. Moreover, we are optimistic about the company's strong balance sheet and improved market share. Nevertheless, the sluggish economic recovery, pressure on top line and stringent regulatory restrictions remain major concerns.

At present, KeyCorp has a Zacks Rank #2 (Buy).

Performance of Other Major Banks

Among other major regional banks, M&T Bank Corporation MTB and Comerica Incorporated CMA beat the Zacks Consensus Estimate. While lower provisions drove better-than-expected results at M&T Bank, Comerica's performance was aided by decline in both expenses and provisions.

However, higher expenses weighed on Northern Trust Corporation's NTRS earnings and the company delivered a negative earnings surprise this quarter. However, this was partially offset by top-line growth.