TEXT-S&P: KeyCorp ratings unaffected by results
Oct 18 - Standard & Poor's Ratings Services today said its ratings on KeyCorp (Key; BBB+/Positive/A-2) are unaffected by the bank's good third-quarter results, which were generally in line with our expectations. Keycorp's net income for the quarter was $219 million, down 7.2% from the prior quarter and up slightly year over year. Net interest income rose 6% from the previous quarter, partially as the result of the redemption of $707 million in trust preferred securities (TRUPs) and lower funding costs, as lower-cost deposits from Keycorp's recent acquisition of 37 branches in Western New York replaced maturing debt and high-rate certificates of deposit. The net interest margin for the consolidated entity rose by 15 basis points (bps) quarter over quarter to 3.14% because of these factors, but the early termination of leveraged leases partially offset this (by 7 bps). Noninterest income rose 12% from the previous quarter, largely because of a $54 million gain associated with the redemption of TRUPs and gains related to the early termination of leveraged leases. Key's noninterest expense rose to $734 million from $714 million quarter over quarter and $692 million year over year. This increase is the result of expenses associated with Keycorp's recent branch and credit card portfolio acquisitions. We believe the company remains on track to reduce expenses by $30 million to $50 million this year as part of their expense management program that will reduce expenses by $150 million to $200 million by December 2013. The bank's balance sheet expanded slightly from the second quarter, with total assets growing .5% to $87.0 billion. Keycorp's loan portfolio (excluding discontinued assets) grew 2.5% quarter over quarter and 6.9% year over year, with commercial and industrial, residential mortgages, home equity loans, and a newly acquired credit card portfolio contributing to that growth. We expect that Key's loan portfolio will continue to slowly grow over the next few quarters, reflecting increased lending opportunities and the gradually decreasing impact of exit portfolio run-off. Total deposits increased 3.3%, primarily as a result of Keycorp's recent branch acquisition. As we expected, credit continues to improve at a decelerating rate. Net charge-offs (NCOs) from continuing operations increased by 23 bps from the previous quarter to .86% of average loans; however, 35 bps of this was the result of updated regulatory requirements. (Loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower now have to be charged off to the collateral's fair value less selling costs and classified as nonaccrual regardless of delinquency status.) Excluding this, NCOs decreased 19% quarter over quarter and 43% year over year, to .51% of average loans. Standard and Poor's adjusted nonperforming assets (NPAs), including all restructured loans, NPAs from discontinued operations, and accruing loans 90 days or more past due, were down 7.5% from the previous quarter and 18.9% from the third quarter of 2011. We expect NCOs to continue to decline in 2013, albeit at a much more moderate pace than 2012. Key's capital ratios remained strong, declining slightly quarter over quarter: the tangible common equity-to-tangible assets ratio fell 5 bps to 10.39%, the Tier 1 common ratio fell 20 bps to 11.43%, and Tier 1 risk-based capital fell 21 bps to 12.24%. Keycorp's estimated Basel III Tier 1 common ratio is strong at 10.5%. Key repurchased 9.6 million shares in the third quarter after repurchasing 10.5 million shares in the second quarter. Our outlook on Keycorp is positive, given we continue to see improvements in profitability, loan performance, and capital ratios over the next two years. Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions.
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