KeyCorp Beats as Bad Loans Abate

Keycorp (KEY) of Cleveland on Wednesday reported second-quarter earnings of $231 million, or 23 cents a share, beating the consensus estimate of an 18-cent profit, among analysts polled by Thomson Reuters.Earnings increased from $194 million, or 21 cents a share, in the first quarter but declined from $234 million, or 26 cents a share, in the second quarter of 2011.The main factor in the second-quarter earnings beat was a decline in the provision for loan losses to $21 million, from $42 million the previous quarter. During the second quarter of 2011, the company made no provision for loan losses, but transferred $8 million out of loan loss reserves.KeyCorp's shares were up 1% in afternoon trading, to $7.91.Second-quarter results were boosted by a $56 million release of loan loss reserves. The company released $60 million in reserves the previous quarter, and $142 million during the second quarter of 2011.KeyCorp's second-quarter tax-adjusted interest income declined to $544 million, from $559 million the previous quarter, and $570 million a year earlier. The net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.06%, from 3.16% in the first quarter and 3.13% during the second quarter of 2011. The second-quarter results included "included a $13 million reduction to net interest income from the write-off of fees as well as capitalized loan origination costs due to the early termination of leveraged leases."The company also said that "the maturities of debt in the second quarter and the redemption of trust preferred securities on July 12 will benefit the net interest margin during the third quarter."Noninterest income increased to $485 million during the second quarter, from $4472 million the previous quarter, and $454 million a year earlier, as the company saw increases in gains on loan sales and leased equipment.Noninterest expense increased to $714 million during the second quarter, from $703 million in the first quarter, and $680 million in the second quarter of 2011. CEO Beth Mooney said that KeyCorp was "launching new efficiency initiatives and identifying opportunities to leverage our strong capital position to make attractive investments in our business, such as our recent branch acquisition in Upstate New York."

The company acquired 37 branches during July, as First Niagara Financial Group (FNFG) divested roughly 100 branches after acquiring about 200 branches from HSBC (HBC). The branch deal included $2.1 billion in deposits and $260 million in loans.

KeyCorp's second-quarter return on average assets was 1.10%, increasing from 0.93% in the first quarter, and 1.10% in the second quarter of 2011. The second-quarter return on average equity was 9.47%, increasing from 8.04% the previous quarter, but declining from 10.12% a year earlier.The company repurchased $10.5 million worth of common shares during the second quarter now has about $260 million authorized for remaining buybacks this year. KeyCorp's shares closed at $7.83 Wednesday, returning 3% year-to-date, following a 12% decline during 2011.KEY data by YChartsThe shares trade for 0.8 times their reports June 30 tangible book value of $9.45, and for 10 times the consensus 2013 earnings estimate of 81 cents a share. The consensus 2012 EPS estimate is 77 cents.Based on a quarterly payout of five cents, the shares have a dividend yield of 2.55%.Jefferies analyst Ken Usdin rates KeyCorp a "Hold" with an $8.50 price target, and while commenting on a "so-so" quarter, called the "expense plan a clear positive," putting "the efficiency ratio in the 60%-65% range."The efficiency ratio is essentially the number of pennies of expenses incurred for every dollar of a bank's revenue. Usdin had previously estimated that KeyCorp's fourth-quarter 2013 efficiency ratio would be 67%, and said Thursday that "assuming our revenue forecast does not change ($1.1B in 4Q13), the mid-point of the efficiency target implies expenses should be $50mm lower than we currently model (on a quarterly basis)," which "would be equivalent to about $0.04 EPS (or $0.16 annually)."Stifel Nicolaus analyst Christopher Mutascio also has a hold rating on KeyCorp, and said later on Thursday that the company's second-quarter gains on leasing equipment were "not sustainable," and that the decline in the net interest margin and net interest income was "a disappointing result for a company in which many investors believed the run off of a high yielding book of certificates of deposit would stabilize, if not improve, the company's margin and net interest income levels."On a more hopeful note, Mutascio said that "looking ahead, the company should benefit from $707 million in [trust preferred shares] that wereredeemed on July 16 and the maturity of $1.4 billion in debt late in the secondquarter."In regard to KeyCorp's efficiency initiative, the analyst said that "although it is good to see management rationalize the company's expense base for what looks to be a long period of stagnant revenue, it appears to us that the expense saves may only offset the inevitable reduction/elimination gains on leveraged leases."Mutascio estimates that KeyCorp will earn 75 cents a share for all of 2012, followed by EPS of 79 cents in 2013.Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.RELATED STORIES: GE: More Dividend Gravy, PleaseFifth Third Beats as Expenses DeclineHuntington Continues Strong GrowthMorgan Stanley Posts Big Earnings MissFeds Hit Capital One Where It Hurts: EarningsCapital One Smacked With Huge Credit Card FineBank of America Sees Mortgage Claims SkyrocketU.S. Bancorp Posts Solid Revenue GrowthPNC Misses but Margin Expansion Offers Hope-- Follow @PhilipvanDoorn >To order reprints of this article, click here: Reprints