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KeyCorp Meets Expectations, Revs Up

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KeyCorp’s (KEY - Free Report) fourth quarter 2012 earnings came in at 22 cents per share. This was in line with the Zacks Consensus Estimate as well as the year-ago earnings.

Considering costs associated with the Fit for Growth efficiency initiative, net income in the reported quarter came in at $197 million or 21 cents per share. This compares with $194 million or 20 cents recorded in the prior-year quarter.

Top-line growth, continued improvement in credit quality and robust capital ratios were the primary highlights of the quarter. However, higher operating expenses marginally subdued the results.

For 2012, KeyCorp’s earnings of 90 cents per share were a penny ahead of the Zacks Consensus Estimate. However, this was marginally below the last year’s earnings of 92 cents.

Behind the Headlines

KeyCorp’s total revenue came in at $1.07 million, rising 9.8% from the prior-year quarter. Moreover, it outpaced the Zacks Consensus Estimate of $1.06 billion.

For 2012, total revenue was $4.26 billion, up 3.7% from $4.10 billion in 2011. Also, this was ahead of the Zacks Consensus Estimate of $4.19 billion.

Tax-equivalent net interest income (NII) totaled $607 million, climbing 7.8% from $563 million in the prior-year quarter. Net interest margin (NIM) also increased 24 basis points (bps) sequentially to 3.37%. The improvements in NII and NIM  primarily driven by a change in funding mix, maturity of long-term debt and maturity of higher-costing certificates of deposit during the past year.

Non-interest income climbed 12.6% year over year to $466 million. The upliftment was primarily a result of elevated service charges on deposit accounts, insurance income, net gains from loan sales as well as investment banking and capital markets income. These were partially offset by a decline in operating lease income and lower gains on leased equipment.

Non-interest expense surged 5.4% from the prior-year quarter to $756 million. The rise was mainly attributable to increased personnel expenditure, net occupancy costs, intangible asset amortization on credit cards as well as higher other intangible asset amortization. These were partially offset by a fall in operating lease expense, business services and professional fees  as well as other real estate owned (OREO) 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, was 1.39%, in line sequentially and dipping 34 bps year over year.

Also, net charge-offs, as a percentage of average loans, decreased 42 bps both sequentially and year over year to 0.44%. KeyCorp’s allowance for loan and lease losses was 1.68% of period-end loans as of Dec 31, 2012, compared with 1.73% as of Sep 30, 2012 and 2.03% as of Dec 31, 2011.

Provision for loan and lease losses came in at $57 million, down 47.8% from $109 million recorded in the prior quarter. However, it was substantially up from credit provision of $22 million in the prior-year quarter.

Balance Sheet

As of Dec 31, 2012, KeyCorp had total assets of $89.2 billion compared with $87.0 billion as of Sep 30, 2012, and $88.8 billion as of Dec 31, 2011.

Average deposits came in at $63.9 billion, up from $62.7 billion as of Sep 30, 2012 and $59.6 billion as of Dec 31, 2011. Further, average loans stood at $51.9 billion compared with $50.7 billion as of Sep 30, 2012 and $48.7 billion as of Dec 31, 2011.

Capital Ratios

Capital ratios continued to remain strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 10.15% as of Dec 31, 2012, compared with 9.88% as of Dec 31, 2011. In addition, Tier 1 common equity ratio was 11.16%, compared with 11.26% at the end of the prior-year quarter.

The company’s estimated Basel III Tier 1 common ratio was 10.17% at the end of the reported quarter compared with 10.14% in the previous quarter.

Share Repurchase Update

During the quarter, KeyCorp bought back 10.53 million shares worth $89 million. Following these repurchases, the company has remaining authority to repurchase up to $88 million of its common shares under its new share repurchase program, which has no expiration date.

Peer Performances

Among other major regional banks, BB&T Corp. (BBT - Free Report) , State Street Corporation (STT - Free Report) and Fifth Third Bancorp (FITB - Free Report) reported better-than-expected fourth-quarter earnings. Top-line growth was the main contributing factor for the improved results at these companies.

Our Take

We expect KeyCorp’s business restructuring actions to continue to fuel its credit quality and liquidity. Though the company’s capital deployment plan highlights its stable capital position, we remain wary of the persisting slow economic recovery, stringent regulatory restrictions and the low interest rate scenario. Nevertheless, we are optimistic on the company’s strong balance sheet and improved market share.

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

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