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KeyCorp.’s (KEY - Analyst Report) second-quarter earnings from continuing operations came in at 27 cents per share, surpassing the Zacks Consensus Estimate of 25 cents. This marks the company’s sixth consecutive earnings beat. Moreover, this was up 28.6% from the year-ago figure of 21 cents.

Results benefited from lower expenses, a decline in provision for loan and lease losses and higher non-interest income. However, the pressure on net interest income as well as net interest margin (NIM) persisted, given a still low interest rate scenario. Further, continued improvement in asset quality, growth in loan and deposit balances, strong capital ratios and improved credit quality were other highlights of the quarter.

Net income from continuing operations attributable to common shareholders came in at $242 million, up 25.4% year over year.
 

Behind the Headlines

KeyCorp’s total revenue came in at $1.03 billion, up 1.9% from the prior-year quarter. Further, it was 1.7% higher than the Zacks Consensus Estimate $1.02 billion.

Tax-equivalent net interest income fell 1.2% from the prior-year quarter to $579 million. Likewise, NIM from continuing operations decreased 15 basis points (bps) year over year to 2.98%. 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 deposit certificates and a favorable mix of lower-cost deposits.

Non-interest income grew 6.1% year over year to $455 million. The rise was largely attributable to increase in investment banking and debt-placement fees, net gains from principal investing and operating lease income and other leasing gains, partially offset by decrease in trust and investment services income, service charges on deposit accounts and various other items.

Non-interest expense fell 3.1% from the prior-year quarter to $689 million. The decrease was mainly due to a fall in salaries and employee benefits. .

As of Jun 30, 2014, average total deposits came in at $66.5 billion, up 2.5% year over year. Further, average total loans were $55.6 billion, up 5.5% from Jun 30, 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 0.74%, down 56 bps year over year. Moreover, net loan charge-offs, as a percentage of average loans, decreased 12 bps year over year to 0.22%.

KeyCorp’s allowance for loan and lease losses was $814 million, down 7.1% from the year-ago quarter. Further, provision for loan and lease losses came in at $10 million, down 64.3% year over year.

Capital Ratios

Capital ratios were strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 10.15% as of Jun 30, 2014, compared with 9.96% as of Jun 30, 2013. In addition, Tier 1 common equity ratio was 11.33% versus 11.18% as of Jun 30, 2013. Again, Tier 1 risk-based capital ratio was 12.07% versus 11.93% as on Jun 30, 2013.

The company’s estimated Basel III Tier 1 common ratio was 10.77% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.

Capital Deployment Activities

During the reported quarter, KeyCorp bought back shares worth $108 million and raised dividend by 18% to $0.065 per common share.

KeyCorp’s 2014 capital plan includes buyback of up to $542 million through first-quarter 2015.

Our Take

Decline in expenses and efficient organic growth strategy should continue supporting KeyCorp’s long-term performance. Moreover, we are optimistic about the company’s strong balance sheet and capital position. 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).

Performance of Other Major Banks

Among other major regional banks, Comerica Incorporated (CMA - Analyst Report) posted second-quarter earnings per share of 80 cents, beating the Zacks Consensus Estimate by 5.3%.

Citigroup Inc. (C - Analyst Report) reported second-quarter adjusted earnings per share of $1.24, outpacing the Zacks Consensus Estimate of $1.08.

BankUnited, Inc. (BKU - Analyst Report) is scheduled to report on Jul 24.

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