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KeyCorp (KEY) Earnings Lag on Higher Provisions & Costs

Higher provisions led KeyCorp.’s KEY first-quarter 2016 adjusted earnings from continuing operations of 24 cents per share to miss the Zacks Consensus Estimate by a penny. Also, the figure compared unfavorably with the year-ago figure of 26 cents.

 



Results were adversely impacted by a significant rise in provision for loan losses, higher operating expenses and a decline in non-interest income, partially offset by an increase in net interest income. Nonetheless, a steady rise in loans and deposit balances as well as strong capital ratios acted as tailwinds.

Including non-recurring charges of $24 million in merger-related expenses, Keycorp’s net income from continuing operations attributable to common shareholders came in at $182 million, down 18% from the prior-year quarter.

Behind the Headlines

Total revenue increased 2.9% year over year to $1.04 billion. This was marginally above the Zacks Consensus Estimate of $1.03 billion.

Net interest income (“NII”) grew 6.1% year over year to $612 million. The rise was driven by higher earning asset balances and a rise in earning asset yields. However, taxable-equivalent net interest margin (“NIM”) from continuing operations fell 2 basis points (bps) year over year to 2.89%.

Non-interest income was $431 million, down 1.4% from the year-ago quarter. The fall was mainly due to consumer mortgage income (33.3%), operating lease income and other leasing gains (down 10.5%), corporate-owned life insurance income (9.7%) and mortgage servicing fees (7.7%).

Non-interest expense jumped 5.1% year over year to $703 million, due to rise in both personnel as well as non-personnel expenses.

As of Mar 31, 2016, average total deposits came in at $71.6 billion, up 4% year over year. Further, average total loans were $60.2 billion, up 4.6% from Mar 31, 2015.

Credit Quality

Credit quality deteriorated during the quarter. Provision for loan and lease losses increased substantially to $89 million, up from $35 million in the prior-year quarter.

Additionally, net loan charge-offs, as a percentage of average loans, increased 11 bps year over year to 0.31%. Also, KeyCorp’s allowance for loan and lease losses was $826 million, up 4% year over year.

Further, nonperforming assets, as a percentage of period-end portfolio loans, other real estate owned properties (“OREO”) assets and other nonperforming assets were 1.12%, up 37 bps year over year.

Capital Ratios

Capital ratios were strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 9.97% as of Mar 31, 2016, up from 9.92% as of Mar 31, 2015. In addition, Tier 1 risk-based capital ratio was 11.42% versus 11.04% as of Mar 31, 2015.

The company’s estimated Basel III Tier 1 common ratio was 11.05% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.

Our Take

Higher credit costs owing to exposure to energy sector remains a matter of concern. Also, KeyCorp’s financials remain challenged by regulatory changes within the financial services industry. However, we remain encouraged by the company’s consistent efforts to streamline operations, diversify products and exit non-core businesses to propel efficiency and growth.

Keycorp currently carries a Zacks Rank #4 (Sell).

Performance of Other Major Banks

Comerica Incorporated’s CMA first-quarter 2016 earnings per share of 34 cents lagged the Zacks Consensus Estimate of 42 cents. Higher expenses, lower non-interest income and increased provision for credit losses were the downsides. However, elevated net interest income and loans balances acted as tailwinds.

U.S. Bancorp USB reported first-quarter 2016 earnings per share of 76 cents beat the Zacks Consensus Estimate by a penny. Organic growth was driven by higher revenues along with elevated average loans and deposits. However, increase in expenses and provisions were a major drag.

SunTrust Banks, Inc. STI is scheduled to report fourth-quarter 2015 results on Apr 22.

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