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KeyCorp.’s (KEY - Free Report) third-quarter adjusted earnings per share came in at 28 cents. This surpassed the Zacks Consensus Estimate and the year-ago quarter figure of 22 cents.

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

After considering costs related to the ‘Fit for Growth’ efficiency initiative as well as pension settlement charge, net income from continuing operations attributable to common shareholders came in at $229 million or 25 cents per share. This was up from $211 million or 22 cents per share recorded in the prior-year quarter.

Behind the Headlines

KeyCorp’s total revenue came in at $1.04 billion, declining 4.8% from the prior-year quarter. However, it beat the Zacks Consensus Estimate of $1.02 billion.

Tax-equivalent net interest income (NII) totaled $584 million, nudging up 1.0% from $578 million in the prior-year quarter. However, net interest margin (NIM) decreased 2 basis points (bps) year over year to 3.11%. The decline in NIM was primarily due to a fall in earning assets yields, partially offset by lower funding costs.

Non-interest income declined 11.4% year over year to $459 million. This was primarily due to decrease in other income, consumer mortgage income, service charges on deposit accounts as well as operating lease income and other leasing gains. These were partially offset by a rise in investment banking and debt placement fees, corporate services income, cards and payments income as well as net gains from principal investing.

Non-interest expense rose marginally from $ 712 million in the prior-year quarter to $716 million. The increase was mainly due to higher personnel expense, partially offset by a decrease in non-personnel expense.
Credit Quality

Credit quality improved during the quarter. Nonperforming assets, as a percentage of period-end portfolio loans, OREO assets and other nonperforming assets were 1.08%, falling 31 bps year over year. Moreover, net charge-offs, as a percentage of average loans, decreased 58 bps year over year to 0.28%.

KeyCorp’s allowance for loan and lease losses was 1.62% of period-end loans as of Sep 30, 2013 and 1.73% as of Sep 30, 2012. Moreover, provision for loan and lease losses came in at $28 million, down 74.3% year over year.

Balance Sheet

As of Sep 30, 2013, KeyCorp had total assets of $90.7 billion compared with $87.0 billion as of Sep 30, 2012.

Average deposits came in at $65.4 billion, up 5.4% from $62.0 billion as of Sep 30, 2012. Further, average loans were $53.3 billion, up 5.1% from the year-ago quarter.

Capital Ratios

Capital ratios continued to remain strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 9.93% as of Sep 30, 2013, compared with 10.39% as of Sep 30, 2012. In addition, Tier 1 common equity ratio was 11.11%, compared with 11.30% 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 10.56% in the previous quarter-end.

Share Repurchase

During the reported quarter, KeyCorp bought back shares worth $198 million. This followed the Federal Reserve’s approval of the company’s 2013 capital plan in March.

Other Developments

In July, KeyCorp completed the sale of Victory Capital Management and Victory Capital Advisors to Crestview Partners – a private equity firm, which resulted in an after-tax net gain of $92 million.

Our Take

We expect KeyCorp’s business restructuring actions to continue boosting its credit quality and liquidity. Moreover, we are optimistic about the company’s strong balance sheet and improved market share. However, the sluggish economic recovery and stringent regulatory restrictions remain major concerns.

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

Among other major regional banks, Fifth Third Bancorp (FITB - Free Report) and BB&T Corporation (BBT - Free Report) are scheduled to report their results on Oct 17, while State Street Corporation (STT - Free Report) will do so on Oct 22.

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