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KeyCorp.’s (KEY - Analyst Report) second-quarter adjusted earnings came in at 24 cents per share, surpassing the Zacks Consensus Estimate of 20 cents. Moreover, this was marginally ahead of the year-ago earnings of 23 cents.

Considering costs associated with the ‘Fit for Growth’ efficiency initiative, net income attributable to common shareholders came in at $193 million or 21 cents per share. This compares with $217 million or 23 cents recorded in the prior-year quarter.

Better-than-expected quarterly results were primarily driven by top-line growth, which was partially offset by a decrease in non-interest income and a rise in operating expenses. Moreover, continued improvement in asset quality and strong capital ratios were the other highlights of the quarter.

Behind the Headlines

KeyCorp’s total revenue came in at $1.02 million, rising 1.4% from the prior-year quarter. However, it lagged the Zacks Consensus Estimate of $1.03 billion.

Tax-equivalent net interest income (NII) totaled $586 million, climbing 7.7% from $544 million in the prior-year quarter. Likewise, net interest margin (NIM) increased 7 basis points (bps) year over year to 3.13%. The improvement in NIM was primarily driven by a change in funding mix as well as maturity of long-term debt and higher-costing certificates of deposit in 2012.

Non-interest income declined 6.1% year over year to $429 million. The drop primarily resulted from a fall in operating lease income and other leasing gains as well as reduced net gains from principal investing. These were partially offset by a rise in investment banking and debt placement fees, cards and payments income as well as trust and investment services income.

Non-interest expense inched up 2.6% from the prior-year quarter to $711 million. The rise was mainly attributable to an increase in personnel expense and net occupancy costs and various other miscellaneous expenses, partially offset by a decrease in non-personnel expense, business services and professional fees, marketing expense and other real estate owned expense.

Credit Quality

Credit quality continued to display an improvement during the quarter. Nonperforming assets, as a percentage of period-end portfolio loans, OREO assets and other nonperforming assets were 1.30%, dipping 21 bps year over year. Also, net charge-offs, as a percentage of average loans, decreased 29 bps year over year to 0.34%.

KeyCorp’s allowance for loan and lease losses was 1.65% of period-end loans as of Jun 30, 2013 and 1.79% as of Jun 30, 2012. However, provision for loan and lease losses came in at $28 million, up 33.3% from $21 million recorded in the prior-year quarter.
Balance Sheet

As of Jun 30, 2013, KeyCorp had total assets of $90.6 billion compared with $86.5 billion as of Jun 30, 2012.

Average deposits came in at $64.9 billion, up 7.6% from $60.3 billion as of Jun 30, 2012. Further, average loans stood at $52.7 billion increasing 6.6% from $49.4 billion as of Jun 30, 2012.

Capital Ratios

Capital ratios continued to remain strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 9.96% as of Jun 30, 2013, compared with 10.44% as of Jun 30, 2012. In addition, Tier 1 common equity ratio was 11.25%, compared with 11.63% at the end of the prior-year quarter.

The company’s estimated Basel III Tier 1 common ratio was 10.81% at the end of the reported quarter compared with 10.28% in the previous quarter.

Capital Deployment Activities

During the quarter, KeyCorp bought back shares worth $112 million. This followed the Federal Reserve’s approval of the company’s 2013 capital plan. Moreover, in May KeyCorp hiked its dividend by 10% to 5.5 cents per share.

Further, in May, KeyCorp declared that it received the Fed’s approval for additional capital deployment through share purchases following the completion of the sale of Victory Capital Management and Victory Capital Advisors to Crestview Partners – a private equity firm.

The company plans to request for more capital deployment on the after-tax gains related to the final value of the seller’s note in 2014.

Performance of Other Major Regional Banks

M&T Bank Corporation (MTB - Analyst Report) and Comerica Incorporated (CMA - Analyst Report) reported better-than-expected second-quarter earnings. For M&T Bank, earnings were primarily aided by higher revenues on the back of increased net interest and non-interest income. Comerica’s results reflected increased non-interest income and reduced expenses.

Nevertheless, U.S. Bancorp’s (USB - Analyst Report) results were aided by reduced non-interest expenses and a lower provision for credit losses, as the company’s second-quarter earnings were in line with the Zacks Consensus Estimate.

Our Take

We expect KeyCorp’s business restructuring actions to continue fuelling its credit quality and liquidity. Though the company’s capital deployment initiatives highlight its capital strength, persisting slow economic recovery, stringent regulatory restrictions and the low interest-rate scenario remain major concerns. However, we are optimistic on the company’s strong balance sheet and improved market share.

KeyCorp currently carries a Zacks Rank #3 (Hold).
 

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