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KeyCorp.’s (KEY - Analyst Report) fourth-quarter adjusted earnings were 28 cents per share, outpacing the Zacks Consensus Estimate of 24 cents on the back of prudent expense management. Moreover, this was up 20.0% from the year-ago quarter figure of 20 cents.
Better-than-expected results were mainly driven by growth in non-interest income, a fall in provision for loan and lease losses as well as lower-than-expected operating expenses. These were partially offset by a decrease in net interest income. Further, continued improvement in asset quality, growth in loan and deposit balances and strong capital ratios were the other highlights.
After considering costs related to the ‘Fit for Growth’ efficiency initiative and the pension settlement charge, net income from continuing operations attributable to common shareholders came in at $229 million, up 20.5% year over year.
For full-year 2013, adjusted net income from continuing operations attributable to common shareholders came in at $964 million or $1.01 per share. This was up from $813 million or 86 cents per share in 2012. Earnings per share surpassed the Zacks Consensus Estimate of 94 cents.
Behind the Headlines
KeyCorp’s total revenue came in at $1.04 billion, down 0.4% from the prior-year quarter. However, it beat the Zacks Consensus Estimate of $1.03 billion.
For 2013, total revenue came in at $4.11 billion, dipping 0.7% from the prior year. However, it surpassed the Zacks Consensus Estimate of $4.08 billion.
Tax-equivalent net interest income (NII) fell 3.0% from the prior-year quarter to $589 million. Likewise, net interest margin (NIM) decreased 36 basis points (bps) year over year to 3.01%. The decline in both NII and NIM was mainly due to a fall in earning assets yields and rise in deposit levels, partially offset by maturity of higher-rate certificates of deposit and a favorable mix of lower-cost deposits.
Non-interest income grew 3.2% year over year to $453 million. The rise was largely attributable to significant increase in mortgage servicing fees, net gains from principal investing and other income, partially offset by decrease in consumer mortgage income and investment banking and debt placement fees.
Non-interest expense fell 3.0% from $734 million in the prior-year quarter to $712 million. The decrease was mainly due to lower personnel expense.
As of Dec 31, 2013, average deposits came in at $67.8 billion, up 7.5% from $63.1 billion as of Dec 31, 2012. Further, average loans were $53.6 billion, up 3.4% from Dec 31, 2012.
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 0.97%, down 42 bps year over year. Moreover, net charge-offs, as a percentage of average loans, decreased 17 bps year over year to 0.27%.
KeyCorp’s allowance for loan and lease losses was $848 million, down 4.5% from the year-ago quarter. Further, provision for loan and lease losses came in at $17 million, down 66.7% year over year.
Though capital ratios deteriorated during 2013, these continued to remain strong. KeyCorp's tangible common equity to tangible assets ratio was 9.80% as of Dec 31, 2013, compared with 10.15% as of Dec 31, 2012. In addition, Tier 1 common equity ratio was 11.23% against 11.36% as of Dec 31, 2012.
The company’s estimated Basel III Tier 1 common ratio was 10.63% at the end of the reported quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.
During the reported quarter, KeyCorp bought back 7.7 million shares worth $99 million. This followed the Federal Reserve’s approval of the company’s 2013 capital plan in March. In 2013, the company repurchased share worth $474 million.
Performance of Other Major Banks
Earnings per share of both SunTrust Banks, Inc. (STI - Analyst Report) and BB&T Corp. (BBT - Analyst Report) beat the Zacks Consensus Estimate. Better-than-expected results were driven by disciplined expense management and a significant decline in provision for credit losses.
Another major bank, State Street Corp. (STT - Analyst Report) is scheduled to announce results on Jan 24.
We expect KeyCorp’s business restructuring action to continue boosting its credit quality and liquidity. 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 #3 (Hold).